NORBERG v. SECURITY STORAGE CO.: STRETCHING THE … · NORBERG v. SECURITY STORAGE CO.: STRETCHING THE LIMITS OF THE DOCTRINE OF ACQUIESCENCE IN FREEZE-OUT MERGERS By BRUCE L. SILVERSTEIN'AND

NORBERG v. SECURITY STORAGE CO.: STRETCHINGTHE LIMITS OF THE DOCTRINE OF ACQUIESCENCE

IN FREEZE-OUT MERGERS

By BRUCE L. SILVERSTEIN'AND DAVID C. MCBRIDE*

ABSTRACT

Pursuant to the doctrine of acquiescence, a stockholder who tendershis shares and accepts the benefits of a transaction may be barred fromseeking equitable relief Thus, if the stockholder is fully informed of all

*Bruce L. Silverstein is a partner in Young Conaway Stargatt & Taylor, LLP inWilmington, Delaware. Mr. Silverstein joined Young Conaway Stargatt & Taylor, LLP upongraduating with honors from Villanova Law School in 1986. Since joining the firm, Mr.Silverstein has concentrated his practice mainly in corporate law as well as corporate andcommercial litigation. In nearly 15 years of practice, Mr. Silverstein has tried a number ofcorporate disputes and prosecuted and defended a number of appeals before the DelawareSupreme Court. The more significant cases in which Mr. Silverstein has been actively involvedinclude Paramount Communications Inc. v. QVC Network, Inc., MG. Bancorporation v. LeBeau, Rapid-American Corp. v. Harris, Elliott Assocs, L.P. v. Avatex Corp., Alabama By-Products Corp. v. Cede & Co., In re RJR Nabisco, Inc. Shareholders Litigation, Robert M BassGroup, Inc. v. Evans., and Freedman v. Restaurant Associates Indus., Inc. In addition, Mr.Silverstein was appointed Master in Chancerypro hac vice in the matter of SJCPA Holdings, S.A.v. Optical Coating Lab., which resulted in the issuance of a decision adopted by the court. Mr.Silverstein is a member of the Corporate Council of the Corporate Law Section of the DelawareState Bar Association, is a former associate member of the Board of Bar Examiners of the Stateof Delaware, has authored several articles and CLE outlines in the area of corporate law, is amember of the Editorial Board of Judges & Lawyers Business Valuation Update, and hascontributed editorial comment and review in connection with the recent publications of the firstedition of The Lawyer's Business Valuation Handbook (published by the ABA) and the fourthedition of Shannon Pratt's Valuing a Business: The Analysis and Appraisal of Closely HeldCompanies.

"'David C. McBride is a partner in Young Conaway Stargatt & Taylor, LLP inWilmington, Delaware. A graduate of the Georgetown University School of Foreign Service in1971, and the Emory University School of Law in 1975, Mr. McBride began private practice in1975. His practice is concentrated in corporate law and also corporate and commercial litigation.He has been involved in a plethora of Delaware corporate law cases, particularly in the area ofmergers and acquisitions, including Paramount Communications Inc. v. QVC Network, Inc.,Paramount Communications Inc. v. Time Inc., Revlon Inc. v. MacAndrews & Forbes HoldingInc., In re First Boston Inc. Shareholders Litigation, In re Resorts International ShareholdersLitigation, Freedman v. RestaurantAssociates Indus., Inc., RobertM Bass Group, Inc. v. Evans(Macmillan, Inc.), Shamrock Holdings Inc. v. Polaroid Corp., In re RJR Nabisco, Inc.Shareholders Litigation, Henley Group v. Santa Fe Southern Pacific Corp., Pennzoil Co. v. GettyOil Co., Elliott Assocs, L.P. v. Avatex Corp., and Edelman v. Phillips Petroleum. Mr. McBrideis a member of the American Law Institute, the Corporate Council of the Corporate Law Sectionof the Delaware State Bar Association, the Rules Committee of the Delaware Court of Chancery,the Board of Editors of the Delaware Lawyer, a director of the Historical Society for the Courtof Chancery, and has authored several articles and CLE outlines in the area of corporate law.

DELAWARE JOURNAL OF CORPORATE LAW

material information relevant to a given transaction, the doctrine ofacquiescence may result in an equitable estoppel precluding thestockholder who accepted the benefits of the transaction with knowledgeof the alleged inequitable conduct from challenging the transaction.

The Delaware Court of Chancery decision in Norberg v. SecurityStorage Co. (Norberg I) represents the first decision of a Delaware courtto apply the affirmative defense of acquiescence to bar a minoritystockholder who did not vote in favor of a merger from pursuing a claimfor breach offiduciary duty by a majority stockholder in connection withafreeze-out merger. In so doing, Norberg I also became the first time aDelaware court barred claims of a minority stockholder in a freeze-outmerger based on the affirmative defense of acquiescence where the mergerwas approved by the consent of the majority stockholder without any voteof the minority stockholders; the merger was neither conditioned upon theapproval of a majority of the minority stockholders or negotiated by aspecial committee of directors; the complaint raised an issue of "unfairdealing"; and there was no judicial determination that there were nomaterial misstatements or omissions in the defendants'disclosures relatingto the merger. The fact that all of these circumstances were present inNorberg I makes the decision particularly significant.

This article concludes that the mere fact that a fully-informedminority stockholder surrenders his or her stock certificates for the mergerconsideration following the consummation of a freeze-out merger shouldnot, standing alone, support the application of the affirmative defense ofacquiescence. Furthermore, this article highlights the split of authority inthe decision of the Delaware Court of Chancery and calls upon theDelaware Supreme Court for a resolution.

TABLE OF CONTENTSPage

I. INTRODUCTION ..................................... 56II. HISTORY OF THE ACQUIESCENCE DEFENSE IN CONNECTION

WITH FREEZE-OUT MERGERS .......................... 58A. Trounstine: Engrafting the Equitable Doctrine of

Acquiescence onto Delaware Corporate Law ........ 60B. Bay Newfoundland, Frank and Federal United: The

Delaware Supreme Court Embraces Trounstine ...... 62C. The 1967 Revision to the Delaware General Corpora-

tion Law: Delaware Gives Birth to the Freeze-OutM erger ....................................... 64

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NORBERG V. SECURITY STORAGE Co.

D. Kahn I: The Court of Chancery Declines to Extend theDoctrine of Acquiescence to Freeze-Out Mergers to Barthe Claims of a Non-assenting Minority StockholderWho Surrenders Her Stock Certificates for the MergerConsideration after the Consummation of a Freeze-OutM erger ....................................... 65

E. The 1981 Amendments to the DGCL: Liberalizing theStatutory Appraisal Remedy ...................... 68

F. Weinberger: The Supreme Court Extends the "Liberali-zed" Appraisal Remedy to Stockholders Who Did NotDemand an Appraisal Pre-Weinberger ............. 69

G. Bershad: Limiting Weinberg's Quasi-Appraisal Remedyto Fully-Informed Stockholders Who Neither Voted inFavor of the Freeze-Out Merger Nor Surrendered TheirStock Certificates for the Merger Consideration ...... 70

H. Serlick: Declining to Apply the Doctrine ofAcquies-cence to Bar Claims of Breach of Fiduciary Duty byStockholders Eliminated in a Freeze-Out Merger ThatWas Not Conditioned upon a Vote of a Majority of theMinority Stockholders ........................... 73

I. The Supreme Court Affirms Bershad: Much Ado aboutNothing ...................................... 74

J. Kahn: Specifically Applying the Doctrine ofAcquies-cence with Respect to the Quasi-Appraisal Remedy .... 76

K. Siegman, Iseman, and Turner: The Court of Chancery'sDicta Breathe New Meaning into the Supreme Court'sDecisions of Bershad and Kahn ................... 82

L. Wood v. Best: The Chancellor Emphasizes the Signifi-cance of the Question of Whether a Stockholder'sAcceptance of the Merger Consideration Was "Volun-tary" ........................................ 84

II. THE DELAWARE COURT OF CHANCERY'S DECISION OFNORBERG V. SECURITY STORAGE CO ...................... 86

IV. WERE NORBERG IAND NORBERG IICORRECTLY DECIDED? ... 90A. The Significance of the Fact That the Freeze-Out

Merger in Bershad Was Conditioned upon the Vote of aMajority of the Minority Stockholders .............. 92

B. The Significance of the Fact That the Freeze-OutMerger in Kahn Was Negotiated by a Special Commit-tee of Directors ............................... 94

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C. The Significance of the Fact That Minority Stock-holders in Bershad and Kahn Were Provided anOpportunity to Vote ............................. 95

D. There Is Nothing "Inequitable" about a Minority Stock-holder Surrendering His or Her Stock Certificates forthe Merger Consideration after a Freeze-Out Merger IsConsummated, While Simultaneously Pursuing a Claimfor Breach of Fiduciary Duty in Connection with theM erger ....................................... 95

V. CONCLUSION ........................................ 98

I. INTRODUCTION

In Norberg v. Security Storage Co. (Norberg I),' the Delaware Courtof Chancery (by a jurist who is now a sitting member of the DelawareSupreme Court) held, as a matter of law, that the plaintiff was barred frompursuing claims of breach of fiduciary duty in connection with a freeze-outmerger' based upon the defendants' assertion of the affirmative defense ofacquiescence. The sole basis for the court of chancery's decision inNorberg I was that the plaintiff surrendered his stock certificates for thecash into which his shares had been converted upon consummation of themerger seventeen months after filing suit for breach of fiduciary duties inconnection with the freeze-out merger.'

As discussed more fully herein, although the significance of this factseems to have passed unnoticed in Norberg I, the decision represents thefirst instance in which a Delaware court has applied the affirmative defenseof acquiescence to bar a minority stockholder who did not vote in favor ofa merger from pursuing a claim for breach of fiduciary duty by a majoritystockholder in connection with a freeze-out merger. In this article, we tracethe historical development of the doctrine of acquiescence in Delawarecorporate law. We also question whether the doctrine should be availableto bar claims of breach of fiduciary duty asserted by fully-informedminority stockholders who do not vote in favor of a freeze-out merger, butwho surrender their stock certificates following the consummation of afreeze-out merger in order to receive the cash into which their equity

'No. 12,885 (Del. Ch. Sept. 19,2000), reprinted in 27 DEL. J. CoRp. L. 378 (2002).'As used herein, the term "freeze-out merger" refers to a merger in which minority

stockholders are eliminated for cash and the majority stockholder acquires ownership of theentire enterprise.

3See Norberg I, slip op. at 2-3, reprinted in 27 DEL. J. CORP. L. at 379.

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NORBERG V. SECURITY STORAGE CO.

interest in the corporation already has been converted by operation of law."Based upon our analysis of the historical development of the doctrine ofacquiescence, we conclude that the mere fact that a fully-informed minoritystockholder surrenders his or her stock certificates for the mergerconsideration following the consummation of a freeze-out merger shouldnot, standing alone, support the application of the affirmative defense ofacquiescence. We reach this conclusion for the three reasons discussedbelow.

First, prior to Norberg I, the Delaware Court of Chancery hasaffirmatively held that the mere fact that a fully-informed minoritystockholder surrenders his or her stock certificates for the mergerconsideration after the consummation of a freeze-out merger will not barthat stockholder from pursuing a claim for breach of fiduciary duty inconnection with the merger. The court of chancery has indicated, however,that a fully-informed minority stockholder may be barred from pursuing aclaim for breach of fiduciary duty if the minority stockholder surrenders hisor her stock certificates for the merger consideration after the merger isconsummated, but those indications were only in the form of dicta.Moreover, prior to Norberg I, the Delaware Supreme Court never sustainedthe application of the affirmative defense of acquiescence to bar a fully-informed minority stockholder from pursuing a claim for breach offiduciary duty in connection with a freeze-out merger--even if thestockholder voted in favor of the merger.5

4For ease of reference, we hereafter use the term "merger consideration" as a short-handfor the cash into which a minority stockholders' shares are converted into the right to receive ina freeze-out merger. As a technical matter, the cash actually paid to the minority stockholdersis not the consideration for the merger. Rather, the consideration for the merger is the agreementby the majority stockholder (or acquisition vehicle) to pay the cash into which the minoritystockholders' shares are to be converted into the right to receive in the merger. The actualconversion of the minority stockholders' shares into the right to receive cash occurs by operationof Delaware law, pursuant to whichever merger statute might be employed. Moreover, thesurviving corporation's obligation to pay the cash to stockholders who transmit their stockcertificates to the corporation is unconditional. If, however, each and every minority stockholderfailed and/or refused to transmit their stock certificates to the corporation, the merger would notfail for lack of consideration. This is because the consideration-in the form of the acquiror'spromise to pay-has already been received before the merger was consummated.

We recognize that the Delaware Supreme Court's decisions in Bershad v. Curtiss-Wright Corp., 535 A.2d 840 (Del. 1987), and Kahn v. HouseholdAcquisttion Corp., 591 A.2d166 (Del. 1991), are widely viewed as holding that the doctrine of acquiescence may apply tobar the claims of fully-informed minority stockholders who vote in favor of a freeze-out mergeror accept the merger consideration after the merger is consummated. As set out more fullyherein, however, neither Bershad nor Kahn actually espouses such a holding, and neitherdecision resulted in the rejection of any otherwise actionable claim for breach of fiduciary dutyon the basis of acquiescence.

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Second, a minority stockholder who surrenders his or her stockcertificates for the merger consideration following the consummation of afreeze-out merger is not making any exchange or otherwise electing oneoption over another. A minority stockholder whose equity interest in acorporation is eliminated in a freeze-out merger has no right to retain hisor her equity. From the moment the freeze-out merger is consummated, theminority stockholders' stock certificates are converted, by operation of law,into the right to receive the amount of cash per share that the majoritystockholder agreed and committed to pay in the agreement of merger. Thisconversion is caused without the consent of minority stockholders who donot vote in favor of the merger.6

Third, a minority stockholder who surrenders his or her shares forthe merger consideration following the consummation of a freeze-outmerger does not do so voluntarily. Rather, the minority stockholdersurrenders his or her stock certificates in order to avoid a number ofadverse consequences. The consequences of not doing so include (1) theloss of interest on the merger consideration (which typically will not bepaid by the surviving corporation without regard to how long a minoritystockholder might wait to surrender his or her shares, and without regardto the reason why the minority stockholder might have delayed in doingso); and (2) incurring "phantom" income on any taxable gain realized as aconsequence of the conversion of the stockholder's shares uponconsummation of the merger.

II. HISTORY OF THE ACQUIESCENCE DEFENSE IN CONNECTIONWITH FREEZE-OUT MERGERS

Although the doctrine of acquiescence can be traced to equityjurisprudence predating the nineteenth century, Delaware courts did not

'In the case of a freeze-out merger conditioned upon the vote of a majority of theminority stockholders, those minority stockholders who vote in favor of the merger facilitate themerger by their vote. In such a circumstance, fully informed minority stockholders who vote forthe merger plainly should be barred from pursuing relief based on the doctrine of acquiescence.Moreover, in such a case, it is arguable that even the minority stockholders who did not vote infavor of the merger should be barred from pursuing a claim for breach of fiduciary duty basedon the related doctrine of ratification-without regard to whether non-assenting minoritystockholders later surrender their stock certificates for the merger consideration. To date, theparameters of the affirmative defense of ratification have not been fully established by theDelaware courts, and we could devote an article to that subject alone. For present purposes, itis sufficient to note that shares of minority stockholders who do not vote in favor of a freeze-outmerger are converted into the right to receive the merger consideration without any action on thepart of such stockholders--without regard to whether the merger is effected unilaterally by themajority stockholder or with the affirmative vote of a majority of the minority stockholders.

NORBERG v SECURI7TSTORAGE Co.

consider the application of the doctrine in the context of corporate actionsaffecting the ownership interests of stockholders until the late 1930s.7Moreover, since Delaware law did not authorize freeze-out mergers until1967,1 the law of acquiescence, as it applies to such transactions, truly is amodem development in Delaware jurisprudence.

The Delaware Court of Chancery's decision in Trounstine v.Remington Rand, Inc.9 is the first reported decision in which a Delawarecourt applied the doctrine of acquiescence to bar a stockholder fromseeking judicial relief from corporate actions affecting the rights associatedwith the ownership of stock. Thereafter, the Delaware Supreme Courtadopted and applied the reasoning in Trounstine in a trilogy of appealsdecided in the early 1940s. 1 As discussed more fully below, none of thesecases involved a stockholder who claimed that a challenged corporateaction involved a breach of fiduciary duty, much less any breach by amajority stockholder. Moreover, in Trounstine, Bay Newfoundland Co. v.Wilson & Co.," and Frank v. Wilson & Co.,12 a non-assenting stockholderhad the right to maintain the status quo as to his or her interest in thecorporation if the stockholder did not wish to participate in the challengedcorporate action, and in Federal United v. Havender"3 the plaintiff had astatutory appraisal remedy that it elected to forego. 4

It was not until the Delaware Court of Chancery's decision in Kahnv. Household Acquisition Corp. (Kahn 1)" that a Delaware court first

'See Trounstine v. Remington Rand, Inc., 194 A. 95 (Del. Ch. 1937).'Prior to 1967, Delaware law authorized a freeze-out merger only in the limited

circumstance where an acquiring corporation owned at least 90% of the shares of the targetcorporation (i.e., short-form mergers). All other mergers were required to be stock-for-stocktransactions. See Stauffer v. Standard Brands Inc., 178 A.2d 311, 314 (Del. Ch. 1962), affd onother grounds, 187 A.2d 78 (Del. 1962) ("a majority stockholder may not under § 251 or § 252eliminate minority stockholders as participants in the continuing enterprise"). As discussed morefully below, the Delaware General Corporation Law was comprehensively revised in 1967. Atthat time, the merger statutes were revised to permit the payment of cash for shares. Althoughthere was the potential prior to 1967 for a majority stockholder in a short-form merger to arguethat stockholders who accepted the merger consideration had acquiesced in the transaction, nodecision of the Delaware Supreme Court appears to have addressed this issue.

9194 A. 95 (Del. Ch. 1937)."0See Bay Newfoundland Co. v. Wilson & Co., 37 A.2d 59, 62 (Del. 1944); Frank v.

Wilson & Co., 32 A.2d 277, 281 (Del. 1943); Federal United Corp. v. Havender, I I A.2d 331,343 (Del. 1940).

1137 A.2d 59 (Del. 1944).1232 A.2d 277 (Del. 1943).1311 A.2d 331 (Del. 1940)."Bay Newfoundland, 37 A.2d at 62; Frank, 32 A.2d at 281; Federal United, 11 A.2d at

343; Trounstine v. Remington Rand, Inc., 194 A. 95 (Del. Ch. 1937).sNo. 6293 (Del. Ch. Jan. 19, 1982), reprinted in 7 DEL. J. CoRP. L. 324 (1982).

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considered the potential application of the doctrine of acquiescence inconnection with a minority stockholder's challenge to a freeze-out merger.In Kahn I, the court declined to extend Trounstine to bar claims of breachof fiduciary duty asserted by a minority stockholder who did not vote infavor of a challenged freeze-out merger, but did surrender her stockcertificates for the merger consideration following the consummation of themerger. 6 In the nearly two decades following Kahn I, the Delaware Courtof Chancery revisited the issue in a number of cases, and the DelawareSupreme Court provided guidance-albeit in dicta-in Bershad and Kahn.As previously noted, however, it was not until Norberg I that a Delawarecourt actually applied the doctrine of acquiescence to bar a fully-informedminority stockholder from pursuing a claim for breach of fiduciary dutysolely because the stockholder surrendered his shares for the mergerconsideration following the consummation of the merger.

In the pages that follow, we trace the development of the doctrine ofacquiescence (as it applies to corporate actions affecting the ownershiprights associated with stock) by the Delaware courts, beginning withTrounstine and leading up to the Delaware Court of Chancery's decision ofNorberg L

A. Trounstine: Engrafting the Equitable Doctrine ofAcquiescenceonto Delaware Corporate Law

The decision in Trounstine v. Remington Rand, Inc."7 is the firstreported decision in which a Delaware court applied the doctrine ofacquiescence to bar a stockholder from seeking judicial relief fromcorporate actions affecting the rights associated with the ownership ofstock. The plaintiff, Lewis Trounstine, sought to invalidate a stock re-classification implemented to eliminate dividends in arrears on a class ofpreferred stock."s Notably, Mr. Trounstine's complaint was not based uponany alleged breach of fiduciary duty. Rather, Mr. Trounstine argued thatthe challenged reclassification was void for statutory invalidity. 9

Mr. Trounstine initially filed suit in New York and sought apreliminary injunction in advance of any vote on the proposedreclassification."0 Before Mr. Trounstine's application was heard by the

'61d.17194 A. 95 (Del. Ch. 1937)."Id. at 96-97.191d. at 97.201d.

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New York courts, the Delaware Court of Chancery decided Keller v.Wilson & Co.,2 where the court upheld the statutory validity of a stockreclassification similar to that involved in Trounstine.' Upon learning ofthe decision in Keller, Mr. Trounstine voluntarily dismissed his New Yorklawsuit.'

Notwithstanding the fact that the proposed reclassification may havebeen statutorily permissible, the law was clear that the stockreclassification was not binding on stockholders who neither voted in favorof the reclassification nor thereafter elected to receive the new sharescreated in the reclassification.24 Accordingly, Mr. Trounstine voted againstreclassification and held onto his shares." Almost a year after thereclassification was implemented, however, the market value of the newshares exceeded the redemption value of the old shares (including thedividends in arrears), and Mr. Trounstine elected to exchange his old sharesfor new ones.26

After Mr. Trounstine exchanged his shares, the Delaware SupremeCourt reversed the Delaware Court of Chancery's decision in Keller.27

Thereafter, Mr. Trounstine filed a second suit challenging the statutoryvalidity of the reclassification.' The corporate defendant sought thedismissal of Mr. Trounstine's complaint based, among other things, uponthe doctrine of acquiescence. 9 In sustaining the defendant's position, thecourt of chancery reasoned:

In the matter of reclassification of stocks of the typehere under review, it is to be supposed that some considera-tion in lieu of cash is given to the class of stockholders whowere entitled to dividend arrearages, for the waiver by them

21180 A. 584 (Del. Ch. 1935).'See Trounstine, 194 A. at 97.2'See id.241d. In the years since Trounstine was decided, the Delaware Code has been amended

to permit amendments to the certificate of incorporation, of the type sought to be implementedin Trounstine, with the consequence that the reclassification would be binding on allstockholders of the corporation-without regard to whether they vote in favor of thereclassification or voluntarily accept the results of the reclassification. See DEL. CODE ANN. tit.8, § 242(aX4) (1974).

25See Trounstine, 194 A. at 96.26See id. at 97.27See id.2 See id"See Trounstine, 194 A. at 98. The defendant also put forth the affirmative defense of

laches.

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of their right to cash payments. The new securities receivedin lieu of the old must in reason be regarded as acceptable tothe holders of the old in liquidation of all capital and dividendrights theretofore belonging to them. No other sensible viewof the matter can be entertained. He who accepts the newrights ought to be regarded as expressing an agreement to letgo of the old ones.

The complainant in this case, however, under the headwe are now considering, wishes to retain the old rights in part(to the extent of the old dividends) and to keep in toto all ofthe new rights given in lieu of all the old ones. His positiondoes not appeal to me as tenable. As a matter of fact, he didnot conclude to participate in the new plan of stockclassification, until time had demonstrated that what he couldreceive in exchange for his old stock was worth more on thecurrent market than was the redemption value of his old stockwhich included all the arrearages thereon. It looks very muchas if the complainant was indulging in speculative delay.

Whether the complainant's conduct be considered asshowing acquiescence or whether it be considered as showingestoppel, is a matter of words. It appears to me, so far as thepresent branch of the case is concerned, as more properlyfalling within the conception of acquiescence, to which isadded an element often times present in estoppel, viz., theelement of speculative waiting to see which of two courses itwould be more to the profit of the complainant to adopt.

Having made his choice, I am of the opinion a court ofequity should hold him to his selection. 0

B. Bay Newfoundland, Frank and Federal United:The Delaware Supreme Court Embraces Trounstine

The Delaware Supreme Court adopted and applied the reasoning ofTrounstine in Bay Newfoundland Co. v. Wilson & Co.,3 Frank v. Wilson& Co.,32 and Federal United Corp. v. Havender 3 As in Trounstine, these

30Id. at 99-100.3137 A.2d 59, 62 (Del. 1944).3232 A.2d 277 (Del. 1943).3311 A.2d 331 (Del. 1940).

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cases involved a stock reclassification designed to eliminate dividend arrearages.Like Trounstine, Bay Newfoundland and Frank arose out of a classic

stock reclassification in which stockholders who did not vote in favor ofthe transaction were legally entitled to retain their pre-reclassificationshares. Citing Trounstine, the Delaware Supreme Court in Bay Newfound-land observed that "[t]he dissenting shareholder, in such case, is in aposition to assert that it is not within the power of the majority to bind himby the amendment; but his right to relief may be lost through hisacquiescence, by ratification or by laches."34 Similarly, in Frank, thesupreme court approvingly cited Trounstine and concluded:

The non-assenting stockholders, therefore, were in a positionto assert that it was not within the power of the majority tobind them by the amendment; but, clearly, the corporateaction was one which could be subsequently ratified by astockholder who had at the first not consented to it, or hisrights might be lost through his laches.35

The transaction in Federal Unitedwas somewhat more complicated.Recognizing that reclassification effected by amendment to the certificateof incorporation would not be binding upon non-assenting stockholders, thedefendants in Federal United sought to bind all stockholders by proposinga stock-for-stock merger between the corporation and a wholly-owned shellsubsidiary.36 The plaintiff claimed that a merger of the type implementedwas statutorily impermissible." After disposing of the plaintiffs statutoryclaim,3" the Delaware Supreme Court went on to consider the implicationsof the decision in Trounstine. In this connection, the court instructed:

Even if we had been compelled to hold that a merger of aparent corporation with its wholly-owned subsidiary was notwithin the contemplation of Section 59, and that the corporateproceeding was no more than an attempt at a reclassificationof shares under Section 26, the act was void only as againstdissenting shareholders; and no supposed public policy wouldhave sufficed to declare the plan to be void and the

34Bay Newfoundland, 37 A.2d at 62 (citing Trounstine, 194 A. at 97).35Frank, 32 A.2d at 281 (citing Trounstine, 194 A. at 97).36Federal United, 11 A.2d at 337.371d.3 d. at 337-43.

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conversion of shares a nullity if all of the interestedshareholders had assented.39

In addition, the Delaware Supreme Court expressly noted that theplaintiff did not contend that the terms of the merger were unfair orinequitable.'0 As such, Federal United did not involve any claim forbreach of fiduciary duty.4

The Delaware Court of Chancery's decision in Trounstine and theDelaware Supreme Courtes decisions in Bay Newfoundland, Frank andFederal United illuminate the significance of the fact that the challengedtransactions in Bershad and Kahn were preceded by a vote of the minoritystockholders. Moreover, the majority stockholders in Bershad and Kahnimplemented procedural safeguards designed to ensure "fair dealing" andleft open only the question of "fair price" to be litigated by dissentingstockholders, if any, in a statutory appraisal action.

C. The 1967 Revision to the Delaware General Corporation Law:Delaware Gives Birth to the Freeze-Out Merger

In 1967, the Delaware General Corporation Law (DGCL) underwenta comprehensive revision to modernize Delaware corporate law. As aresult of the 1967 revisions to the DGCL, a number of corporate actionsbecame permissible that were previously prohibited. Among the mostsignificant revisions was an amendment to section 251 of the DGCL. Thechange authorized mergers in which the equity interest of stockholders ina constituent corporation were converted into the right to receive onlycash.42 With this amendment to section 251, the freeze-out merger wasborn in Delaware.

In its infancy, the freeze-out merger spawned a number of legalissues new to Delaware corporate law. For example, could a majority

391d. at 343 (citing Trounstine v. Remington Rand, Inc., 194 A. 95 (Del. Ch. 1937)).-Federal United, II A.2d at 343."Notwithstanding the fact that the plaintiff did not assert any claim for breach of

fiduciary in Federal United, the plaintiffdid have the right to withdraw from the corporation andobtain a statutory appraisal. Id. at 337-38. Pursuant to explicit statutory provisions, however,the right to seek an appraisal is limited to stockholders who neither vote for a merger norsurrendered their shares for the merger consideration. As such, the loss of appraisal rightscaused by the surrender of shares for merger consideration is not the result of any applicationof the doctrine of"acquiescence." Rather, it is the result of a strict application of the provisionsof the appraisal statute. As will later become apparent, this fact is of significance inunderstanding the import of the Delaware Supreme Court's decisions in Bershad and Kahn.

42DEL. CODE ANN. tit. 8, § 251 (2000).

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stockholder effect a freeze-out merger for the sole purpose of eliminatingminority stockholders, or was a business purpose required? What standardof judicial review would govern claims for breach of fiduciary duty inconnection with a freeze-out merger? What is the legal consequence ofproviding minority stockholders with a veto right? What is the legalconsequence of the majority stockholder negotiating the terms of themerger with a special committee of disinterested and independentdirectors? Is a statutory appraisal the exclusive remedy available tominority stockholders in a freeze-out merger? And, what application willequitable concepts of acquiescence, ratification, and laches have in thecontext of a freeze-out merger?

While an entire article could be written on the manner in which theDelaware courts have dealt (and are continuing to deal) with each of theseissues, we limit our discussion herein to the issue of acquiescence. Webelieve that the doctrine should be applied to bar only the claims of fully-informed minority stockholders who vote in favor of a freeze-out merger,and that the doctrine should not be applied to bar claims of breach offiduciary duty asserted by non-assenting minority stockholders whosurrender their stock certificates for the merger consideration after theconsummation of a freeze-out merger.

D. Kahn I: The Court of Chancery Declines to Extendthe Doctrine of Acquiescence to Freeze-Out Mergers to Bar the Claims

of a Non-assenting Minority Stockholder Who SurrendersHer Stock Certificates for the Merger Consideration

after the Consummation of a Freeze-Out Merger

The Delaware Court of Chancery's decision in Kahn v. HouseholdAcquisition Corp. (Kahn 1)y' is the first decision of a Delaware court toconsider the applicability of the doctrine of acquiescence in a freeze-outmerger. The plaintiff in Kahn did not vote in favor of the freeze-outmerger challenged in that case, but did surrender her shares for the mergerconsideration after the merger was consummated." The defendants soughtto dismiss the plaintiffs claims of breach of fiduciary duty on the basis ofacquiescence . 5 The court of chancery concluded that the doctrine ofacquiescence did not apply to bar the plaintiffs claims.'

"No. 6293 (Del. Ch. Jan. 19, 1982), reprinted in 7 DEL. J. CoRp. L. 324 (1982).4Id.

45Id.4Id.

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Because the decision in Kahn I represents the first effort by aDelaware court to consider the significance of Trounstine in thecircumstances of a freeze-out merger, we quote liberally from the court'sdecision. As the court explained:

For authority, defendants rely on the case of Trounstinev. Remington Rand, Inc. In theory, their motion is based onthe doctrine of acquiescence. It is their position that byaccepting payment and surrendering her shares subsequent tothe consummation of the merger, plaintiff has acquiesced inand accepted the benefits of the acts of the defendantscomplained of in her suit, and that as a consequence she hasforfeited her standing to maintain the action further.

Defendants liken her position to that of one who seeksappraisal rights following a merger, but who thereaftersurrenders his shares and accepts payment of the mergerprice. The law is clear that by so doing such person loses hisright to continue with his appraisal claim. Defendants arguethat this and the decision in Trounstine reflect a policy againstpermitting a litigant to pursue a "no lose" position byaccepting the benefits of a transaction while continuing witha suit to obtain more.

The reference to the appraisal statutes seemsdistinguishable, however. There the sole issue is one ofvalue, and the appraisal right exercised does not involvenecessarily a contention of breach of fiduciary duty as muchas it reflects a difference of opinion. More importantly,however, the appraisal statute expressly provides that theappraisal claim is terminated by a withdrawal of the demandand acceptance of the merger consideration. No statute iscited which would similarly govern plaintiffs situation here.

Thus, for plaintiffs complaint to be dismissed here, thedismissal must be justified under some common law theorysuch as estoppel, laches or acquiescence. Defendants staketheir present position on acquiescence. But in the presentcontext of matters, I cannot conclude that plaintiff hasacquiesced in all acts complained of against defendantssimply because she has accepted payment for her shares at themerger price. I say this because she did so while her suitattacking the merger was pending and being actively pursuedby her.

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Initially, she attempted to enjoin the merger vote. Herapplication was denied for considerations pertaining topreliminary injunctive relief, including a failure todemonstrate the threat of irreparable injury under thecircumstances. Thereafter the merger was approved, as it wassure to be since the defendants owned and controlledsufficient shares to assure approval from the outset. (Thevote was not structured to require approval by a majority ofthe minority shareholders.) Thus, in accepting payment of themerger price, plaintiff did no more than accept the amountshe was powerless to do anything about until such time as shecould present her evidence and obtain a decision in this case.

Moreover, the plaintiffs complaint is not bottomedsolely on a value dispute, as is the situation in an appraisalaction. She is also relying on an alleged lack of properpurpose for the merger and a general contention that themajority shareholder breached a fiduciary duty owed theminority by using its majority position to accomplish themerger on the terms imposed upon the minority. It does notfollow that by accepting an amount that she was temporarilyunable to do anything about the plaintiff thereby acquiescedin all other conduct of the defendants unrelated to the fixingof the merger price.

These factors also serve, I think, to distinguish theTrounstine case. There the plaintiff voted against a proposalto reclassify his preferred shares and thereafter filed suit to setaside the reclassification. Then, significantly, he dismissedhis suit and some months later surrendered his shares inexchange for those authorized by the reclassification. Afteraccepting the benefits of the exchange for several monthsmore, he filed a second suit in his Court to undo thereclassification. His complaint was dismissed on the basisthat by his conduct he had acquiesced in the reclassificationscheme and thus was barred from attacking it. (A reading ofthe decision would indicate that an element of estoppel wasalso present.)

Had the plaintiff here dismissed her suit, surrenderedher shares and accepted the merger price, in the absence ofany claim of material misrepresentations, etc., and thenreinstituted her cause of action, her situation might well fallunder the Trounstine rationale. The difference is, however,

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that defendants are attempting to dismiss her original,ongoing, first-and-only action based solely upon heracceptance of payment of the challenged merger price whileher suit was pending. However, the fact that she elected totake payment while pursuing her suit - under protest so tospeak - negates the existence of an element critical to theTrounstine decision. It belies any thought to acquiescence.

Since the defendants' motion to dismiss is based on thetheory of acquiescence and since on the naked facts arguedthe acceptance of the merger price, standing alone, does notunequivocally indicate acquiescence, at least as I view it, Iconclude that the motion must be denied."7

The court of chancery in Kahn I was of the view that a fully-informed stockholder who does not vote in favor a freeze-out merger, butwho does surrender his or her stock certificates for the mergerconsideration after the merger is consummated, should not be barred by thedoctrine of acquiescence from pursuing a claim for breach of fiduciary dutyin connection with the merger. Because the plaintiff had brought suit toenjoin the freeze-out merger and surrendered her shares for the mergerconsideration only after her preliminary injunction application was deniedby the court, however, the court ofchancery's analysis prior to the final twoparagraphs quoted above is arguably dictum.

E. The 1981 Amendments to the DGCL: Liberalizing theStatutory Appraisal Remedy

In 1981, section 262 of the DGCL (the appraisal statute) wasrepealed and replaced by an amended version of the statute.4 The mostsignificant change affected by the amendment was that it liberalized thestandard for determining fair value by mandating that the court "shallconsider all relevant factors. 49

Prior to the 1981 amendment to the appraisal statute, the Delawarecourts had adopted a relatively mechanical formula for determining value,known as the "block method."" By 1981, however, the investment

471d., slip op. at 2-5, reprinted in 7 DEL. J. CoRP. L. at 326-28 (citing Trounstine v.Remington Rand, Inc., 194 A.95 (Del. Ch. 1937); DEL. CODE ANN. tit. 8, § 262(i) (2000)).

4SDEL. CODE ANN. tit. 8, § 262 (1981) (amended 2000).91,d. § 262(h); 63 Del. Laws 14(h) (1981)."The Delaware block method is a three part analysis where the courts look at asset

value, market value, and earnings value. See generally Joseph Evan Calio, New Appraisals of

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community had developed much more sophisticated methods for valuinga business. Valuation results reached under the block method were nolonger consistent with economic reality. The statutory appraisal processbegan to incorporate valuation methodologies utilized in the investmentcommunity.5

Today, Delaware courts routinely consider valuation methods suchas discounted cash flow, comparable trading value, and comparabletransaction value. 2 In addition, the Delaware courts have wrestled with theissues raised by the concepts of minority discounts and control premia.5 3

These are the same methods routinely employed by investment bankers inconnection with the valuation of various businesses.

F. Weinberger: The Supreme Court Extends the "Liberalized"Appraisal Remedy to Stockholders Who Did Not Demand

an Appraisal Pre-Weinberger

In 1983, the Delaware Supreme Court decided the landmark appealof Weinberger v. UOP, Inc.' Although Weinberger is significant for anumber of reasons, its significance for purposes of the present discussionof acquiescence lies in the fact that Weinberger created an extraordinaryequitable remedy. This remedy extended the "liberalized" appraisalremedy created by the Delaware legislature in 1981 to stockholders whopreviously failed to demand an appraisal.5 The Delaware Supreme Courtlabeled this extraordinary remedy "quasi-appraisal." The court explained:

Obviously, there are other litigants, like the plaintiff,who abjured an appraisal and whose rights to challenge theelement of fair value must be preserved. Accordingly, thequasi-appraisal remedy we grant the plaintiff here will applyonly to: (1) this case; (2) any case now pending on appeal tothis Court; (3) any case now pending in the Court of Chancery

Old Problems: Reflections on the Delaware Appraisal Proceeding, 32 Am. Bus. L.J. 1 (1994)(discussing the role of the block method in determining a stock's fair value).

"See Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983) (holding that theDelaware block method was not the exclusive tool for appraisals); see also Rosenblatt v. GettyOil Co., 493 A.2d 929, 940 (Del. 1985) (clarifring that Weinberger did not abolish the blockmethod, but rather "only it's [sic] exclusivity as a tool of valuation").

"See, e.g., M.G. Bancorporation, Inc. v. LeBeau, 737 A.2d 513 (Del. 1999)."See, e.g., Rapid-American Corp. v. Harris, 603 A.2d 796 (Del. 1992); Cavalier Oil

Corp. v. Harnett, 564 A.2d 1137 (Del. 1989).'457 A.2d 701 (Del. 1983).

"See id. at 714-15.

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which has not yet been appealed but which may be eligiblefor direct appeal to this Court; (4) any case challenging acash-out merger, the effective date of which is on or beforeFebruary 1, 1983; and (5) any proposed merger to bepresented at a shareholders' meeting, the notification of whichis mailed to the stockholders on or before February 23, 1983.Thereafter, the provisions of. .. [section] 262, as hereinconstrued, respecting the scope of an appraisal and the meansfor perfecting the same, shall govern the financial remedyavailable to minority shareholders in a cash-out merger.56

Thus, under Weinberger, a limited class of minority stockholderswhose equity interest in a corporation was eliminated in a freeze-outmerger would be entitled to pursue a quasi-appraisal even though theyotherwise failed to identify any actionable breach of fiduciary duty inconnection with the merger, and even though they had not demanded anappraisal at the time of the merger.

G. Bershad: Limiting Weinberger's Quasi-Appraisal Remedyto Fully-Informed Stockholders Who Neither Voted

in Favor of the Freeze-Out Merger Nor SurrenderedTheir Stock Certificates for the Merger Consideration

Less than two months after the Delaware Supreme Court decidedWeinberger, the Delaware Court of Chancery decided Bershadv. Curtiss-Wright Corp. (Bershad 1)." Significantly, the freeze-out merger inBershad I had been conditioned upon a vote of a majority of the minoritystockholders. Seeking to avoid the consequence of the vote of the minoritystockholders, the plaintiff in Bershad I claimed that the defendants failedto provide adequate disclosure to the minority stockholders in connectionwith the freeze-out mergers."' In addition, the plaintiff asserted a claim thatthe freeze-out merger lacked a proper business purpose.59

The defendants in Bershadlmoved for summary judgment, arguingthat (1) their disclosures were adequate, as a matter of law; and (2) therewas no business purpose requirement for a freeze-out merger.6° The court

561d. (citing DEL. CODE ANN. tit. 8, § 262 (2000))."No. 5827, 1983 Del. Ch. LEXIS 461 (Del. Ch. Mar. 21, 1983).511d. at *2."Id.61Id.

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of chancery found for the defendants on both counts.6' The court thenconsidered the availability of Weinberger's quasi-appraisal remedy inBershad I. Emphasizing the fact that the freeze-out merger in Bershad I(unlike the merger in Weinberger) was approved by an informed vote of amajority of the minority stockholders, the Delaware Court of Chanceryconcluded that the quasi-appraisal remedy should be made available onlyto those minority stockholders who would be eligible for a statutoryappraisal but for the fact that they had made no demand for appraisal-i.e.,only those stockholders who neither voted in favor of the merger norsurrendered their stock certificates for the merger consideration. The courtexplained:

In light of the elimination of the business purpose ruleand my finding of complete disclosure, the Plaintiffs are inthe precarious position of merely challenging the fairness ofthe $23.00 price. It is significant that the Supreme Court hasadopted a more liberal approach to valuation in appraisal andother stock value proceedings. In rejecting the "Delawareblock" method as the exclusive remedy, the court has returnedto the former established principles relegating a stockholderto the basic remedy of appraisal. . . . Accordingly, theprovisions of the appraisal statute, . . . [section] 262, asconstrued by the Supreme Court, including the means forperfecting appraisal rights, shall govern the financial remedyavailable in a cash-out merger....

But, in all of this, the court recognized that there wouldbe other plaintiffs like Weinberger who have renounced anappraisal and whose rights to challenge the value of the stockmust be preserved.

Fairness and the timetable as set by the Supreme Courtdictates that the Plaintiffs' rights to challenge the value of thestock in this instance must survive. However, unlikeWeinberger, those entitled to such appraisal remedy appear tobe those who did not vote in favor of the merger and thosewho did not accept any benefit from the merger. Thosestockholders who voted for the merger have been determinedherein to have been informed voters. Although the SupremeCourt has relaxed the requirement of perfecting appraisalrights in pending cases which are eligible for direct appeal to

61Bershadl, 1983 Del. Ch. LEXIS 461, at *17.

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the Supreme Court, it cannot be said that the Supreme Courtintended a result which would allow informed voters to beentitled to relief.... In Weinberger, the class was enlarged toinclude those who had voted for the merger because theapproval by a majority of the minority was found to bemeaningless, i.e., an uninformed vote.62

Significantly, the court of chancery in Bershadldid not mention thedoctrine of acquiescence and did not cite, much less discuss, the decisionsin Trounstine, Bay Newfoundland, Frank, Federal United, or even Kahn I.We submit that the reason for this conspicuous omission in Bershad I isbecause the court of chancery's determination to exclude stockholders whosurrendered their stock certificates for the merger consideration fromparticipating in a quasi-appraisal was not driven by the doctrine ofacquiescence. Rather, as the court of chancery expressly explained, thedecision was driven by the fact that such stockholders would not have beeneligible to participate in a statutory appraisal action if they had made ademand for appraisal. Moreover, since minority stockholders asserted noactionable claim for breach of fiduciary duty in Bershad I, the court ofchancery was unwilling to deviate from the rule of the appraisal statute thatwould preclude stockholders who surrendered their stock certificates formerger consideration from participating in the quasi-appraisal created inWeinberger. This is the limited aspect of the decision in Bershad I thatdeals with the consequence of a minority stockholder surrendering his orher shares for the merger consideration after the consummation of a freeze-out merger.

A year later, the Delaware Court of Chancery reached the sameresult in Schlossberg v. First Artists Production Co.63 This case involvedfacts materially identical toBershadlinsofaras the issue of the availabilityof a quasi-appraisal was concerned. In Schlossberg, the Vice Chancellorwho decided Bershad I reiterated his reasoning:

The recent holding in Bershad v. Curtiss-Wright,although not cited by the parties, supports this holding. There,on a motion for summary judgment, the Court concluded thatalleged proxy non-disclosure claims and breach of fiduciaryclaims were meritless. Furthermore, an allegation of

21d at * 18- 19 (emphasis added) (citations omitted) (citing DEL. CODE ANN. tit. 8, § 262(2000)).

'No. 6670 (Del. Ch. May 22, 1984), reprinted in 9 DEL. J. CoRP. L. 491 (1984).

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improper business purpose was dismissed because it had beeneliminated by Weinberger v. UOP, Inc. The only claim leftwas a challenge to the fairness of the merger price. Theminority stockholders in Bershad were also entitled to amajority of the minority vote condition. Although Bershaddid not expressly involve a class certification issue, this Courtreasoned that the class should be limited: "... it cannot besaid that the Supreme Court intended a result which wouldallow informed voters to be entitled to relief.""

H. Serlick: Declining to Apply the Doctrine ofAcquiescenceto Bar Claims of Breach of Fiduciary Duty by Stockholders

Eliminated in a Freeze-Out Merger That Was Not Conditionedupon a Vote of a Majority of the Minority Stockholders

Serlick v. Pennzoil Co."5 is the first decision of the Delaware Courtof Chancery after Weinberger to consider the potential application of theaffmnative defense of acquiescence in the context of a freeze-out merger.In Serlick, the court of chancery (by a jurist who is now a sitting memberof the Delaware Supreme Court) concluded that the doctrine ofacquiescence has no application with respect to fully-informed minoritystockholders who do not vote in favor of a freeze-out merger, but dosurrender their stock certificates for the merger consideration after themerger is consummated if the merger is not conditioned upon a vote of amajority of the minority stockholders. The court explained:

[W]here a merger is subject to an informed majority of theminority vote a shareholder who votes in favor of the mergerand surrenders his shares thereby acquiesces in the corporatemerger. However, in the absence of an informed majority ofthe minority approval the surrender of shares, in itself, doesnot demonstrate acquiescence."

Therefore, the court stated that a different result may apply if thefreeze-out merger is conditioned upon a vote of a majority of the minority

"Id., slip op. at 14-15, reprinted in 9 DEL. J. CORP. L. at 498 (citations omitted) (citingBershad v. Curtiss-Wright, No. 5827 (Del. Ch. Mar. 21, 1983); Weinberger v. UOP, Inc., 457A.2d 701 (Del. 1983) (quoting Bershad, No. 5827, slip op. at 15).

6No. 5986 (Del. Ch. Nov. 27, 1984), reprinted in 10 DEL. J. CORP. L. 314 (1985)."Id., slip op. at 7-8, reprinted in 10 DEL. J. CORP. L. at 319 (citation omitted).

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stockholders. 7 Inasmuch as the freeze-out merger in Serlick was not soconditioned, however, this aspect of the court's opinion is dictum. Thestrict holding of Serlick is that the mere fact that a fully-informed minoritystockholder surrenders his or her stock certificates for the mergerconsideration following the consummation of a freeze-out merger shouldnot, standing alone, support the application of the affirmative defense ofacquiescence where the merger is not conditioned upon the vote of amajority of the minority stockholders.

L The Supreme Court Affirms Bershad: Much Ado about Nothing

In 1987, in Bershad v. Curtiss-Wright Corp.,68 the DelawareSupreme Court affirmed the Delaware Court of Chancery's decision inBershadL. In Bershad, the Delaware Supreme Court held that the plaintiffshad asserted no actionable claim for breach of fiduciary duty in connectionwith the freeze-out merger and that minority stockholders who voted forthe merger or surrendered their stock certificates for the mergerconsideration would not be permitted to participate in a quasi-appraisal.69

The court explained:

Plaintiff, John Bershad, brought this action against thedefendants, Curtiss-Wright Corporation ("Curtiss-Wright")and Dorr-Oliver Incorporated ("Dorr-Oliver"), in the Court ofchancery, challenging a 1979 cash-out merger of Dorr-Oliverby its parent, Curtiss-Wright. Bershad alleged (1) that themerger was effectuated without a proper business purpose;and (2) that the shareholder vote approving the merger wasinvalid since Dorr-Oliver's proxy statement failed to informminority stockholders that Curtiss-Wright had a strict policyagainst selling its 65% holdings in Dorr-Oliver.

The Vice Chancellor held that under Weinberger v.UOP, Inc., Bershad's improper purpose claim failed. Inaddition, the trial judge found that defendants did not breachtheir fiduciary duty of candor since the proxy statement fullyinformed minority shareholders of all material facts regardingthe merger. The Court of chancery then dismissed the claimsof Bershad and all stockholders who either voted in favor of

671d.68535 A.2d 840 (Del. 1987).69d. at 842.

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the merger or accepted its benefits by tendering their sharesfor payment under the merger agreement. 70

Significantly, the decision affirmed by the Delaware Supreme Courtin Bershad did not turn on any application of the doctrine of acquiescence.The Delaware Supreme Court's decision was merely a noncontroversialaffirmance of a determination that stockholders who voted in favor of amerger or accepted a merger consideration, and who did not have acognizable cause of action for breach of fiduciary duty in connection witha merger, would not be granted the equitable remedy of a quasi-appraisalcreated in Weinberger. The decision in Bershad did not cut off the rightsof any stockholder who otherwise possessed an actionable claim for breachof fiduciary duty based on the act of voting for a merger or accepting amerger consideration.

Notwithstanding the fact that the decision affirmed in Bershad didnot involve an application of the doctrine of acquiescence, the DelawareSupreme Court did cite to Trounstine and state that the plaintiff had"acquiesced in the transaction."7 This aspect of the Delaware SupremeCourt's decision, however, does not even comprise a single paragraph ofthe court's nine-page published opinion. Moreover, the court neverspecifically stated that it was applying the doctrine of acquiescence andprovided no discussion concerning the elements of acquiescence. As such,it is difficult to say what significance, if any, the Delaware Supreme Courtintended by its citation to Trounstine.

It is arguable that the doctrine applicable in Bershadwas the doctrineof ratification, which cuts off claims of minority stockholders where thechallenged transaction is approved by a vote of disinterested stockholders. 2

For example, in Frank v. Wilson & Co.,73 the Delaware Supreme Courtexplained that the central difference between the defenses of acquiescenceand ratification is that "[a]cquiescence properly speaks of assent by wordsor conduct during the progress of a transaction, while ratification suggestsan assent after the fact," and noted that "acquiescence may rest on the

"Id. at 841 (citing Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983)).71d. at 848.'2AccordBay Newfoundland Co. v. Wilson& Co., Del. Supr., 37 A.2d 59, 63-64 (1944)

(applying acquiescence in setting similar to Trounstine, and noting significance of facts thatstockholders voted and transaction was "ratifiable"). Notably, the court of chancery recentlycited the supreme court's decision in Bershad as providing potential guidance respecting theissue of whether the ratification doctrine will bar minority stockholders from pursuing otherwiseactionable claims for breach of the duty of loyalty by a majority stockholder in a freeze-outmerger. See Solomon v. Armstrong, 747 A.2d 1098, 1116-17 (Del. Ch. 1999).

"32 A.2d 277 (Del. 1943).

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principle of ratification."74 Inasmuch as acquiescence depends upon actiontaken "during the progress of a transaction," it is difficult to understandhow application of the doctrine could be triggered by surrendering stockcertificates for merger consideration in a freeze-out merger when this actdoes not (and cannot) occur until after the consummation of the merger.By contrast, the act of voting in favor of a freeze-out merger-which hasrepeatedly been recognized as giving rise to a bar to the pursuit of equitablerelief in connection with the merger--does occur "during the progress ofthe transaction," and may properly implicate the doctrine of acquiescence.

In any event, it is clear from the Delaware Court of Chancery'sdecision in Bershad I that the Delaware Supreme Court's decision did notresult in cutting off any minority stockholder from pursuing an otherwiseactionable claim for breach of fiduciary duty, but merely affirmed the courtof chancery's equitable limitation upon the pool of former stockholdersentitled to participate in the quasi-appraisal action created in Weinberger.Moreover, because the minority stockholders in Bershad had asserted noactionable claim for breach of fiduciary duty, they could be viewed ashaving made an election similar to that made by the plaintiff in Trounstinewhen they abjured the appraisal remedy and accepted the mergerconsideration.

Significantly, one of the three members of the panel of the DelawareSupreme Court that decided Bershad was the same jurist who previouslydecided Serlick. Of equal significance, the Delaware Supreme Courtemphasized the fact that the freeze-out merger in Bershad was conditionedupon the vote of a majority of the minority stockholders (unlike the freeze-out merger in Serlick), and the court expressed no disagreement withSerlick, which would limit the application of any rule announced inBershad to mergers involving such a condition.

J. Kahn: Specifically Applying the Doctrine of Acquiescencewith Respect to the Quasi-Appraisal Remedy

In Kahn v. Household Acquisition Corp.,76 the Delaware SupremeCourt (by a jurist who is not a sitting member of the Delaware SupremeCourt) found, after a trial on the merits, that the defendants committed noactionable breach of fiduciary duty in connection with the freeze-outmerger challenged in that case. Thereafter, in reliance upon Bershad, the

41d. at 283.'See Bershad, 535 A.2d at 843.6No. 6293 (Del. Ch. May 6, 1988), reprinted in 14 DEL. J. CoRP. L. 343 (1989).

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defendants moved to limit the class of minority stockholders entitled toparticipate in the quasi-appraisal to those stockholders who neither votedin favor of the merger nor surrendered their stock certificates for themerger consideration after the merger was consummated." The court ofchancery followed the Delaware Supreme Courtes decision in Bershad andheld that all stockholders who voted in favor of the merger would be barredfrom sharing in the quasi-appraisal remedy." With respect to stockholderswho did not vote for the merger, however, the court of chancery held thatonly those stockholders who actually voted (without regard to whether theyvoted against the merger) would be barred from participating in therecovery based upon their subsequent receipt of the merger consideration.79

Stated differently, the court held that a stockholder who does not votecannot be deemed to have acquiesced in the freeze-out merger-withoutregard to whether the stockholder thereafter accepted the mergerconsideration.10

In addition, the court stated that the doctrine of acquiescence cannotbe used to bar claims of fully informed stockholders who voted against thefreeze-out merger if the merger implicates the fair dealing prong of theentire fairness test." Because the court in Kahn II found that thedefendants did deal fairly with the minority stockholder (by, among otherthings, negotiating the merger with a special committee), this aspect of thecourt's opinion is dictum.

"See Kahn v. Household Acquisition Corp., No. 6293 (Del. Ch. Mar. 1,1990), reprintedin 16 DEL. J. CoRp. L. 810 (1991) (Kahn II).

."Id., slip op. at 3-4, reprinted in 16 DEL. J. CoRP. L. at 812.791d.

'°This aspect of the court's decision is consistent with the notion that acquiescencerequires an act taken "during the progress of a transaction." Frank, 32 A.2d at 283.

"Kahn 11, No. 6293, slip op. at 4, reprinted in 16 DEL. J. CORP. L. at 8 12 (acquiescenceapplies to cut-off quasi-appraisal remedy only where the sole issue is fair price). The distinctionbetween fair price and fair dealing claims in the context of acquiescence is akin to thedistinction between due care and loyalty claims in the context ofratification. See, e.g., Solomonv. Armstrong, 747 A.2d 1098, 1116-17 (Del. Ch. 1999); In re Wheelabrator Tech., Inc. SholdersLitig., 663 A.2d 1194, 1202-03 (Del. Ch. 1995), approvingly cited in Williams v. Geier, 671A.2d 1368, 1379 (Del. 1996). Recently, in Solomon v. Armstrong, Chancellor Chandler notedthat Bershad does not address the issue of whether a fully informed stockholder who votes fora freeze-out merger by a majority stockholder will be barred from pursuing a claim arising underthe duty of loyalty, which, by definition, includes claims implicating the unfair dealing prongof the entire fairness test. See Solomon, 747 A.2d at 1117. As such, under Solomon, it isarguable that even a fully informed minority stockholder who votes in favor of a freeze-outmerger will not be barred from pursuing a claim for breach of fiduciary duty. A fortiori, aminority stockholder who does not vote in favor of such a merger would not be barred frompursuing such a claim simply because he or she exchanged his or her shares for the mergerconsideration following the consummation of the merger.

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On appeal in Kahn, the Delaware Supreme Court (1) affirmed theDelaware Court of Chancery's determination that the freeze-out merger didnot involve any actionable breach of fiduciary duty; (2) affirmed theDelaware Court of Chancery's determination to exclude from the quasi-appraisal remedy those fully-informed minority stockholders who voted infavor of the merger; and (3) reversed the Delaware Court of Chancery'sdetermination to exclude from the quasi-appraisal those stockholders whodid not vote in favor of the merger, but did surrender their stock certificatesfor the merger consideration after the merger was consummated . 2 Thecourt explained:

This is an appeal from a decision of the Court ofChancery, after trial, in a class action by minorityshareholders of Wien Air Alaska, Inc. ("Wien") arising out ofthe merger of Wien with its principal shareholder, HouseholdAcquisition Corporation ("HAC"), a wholly-owned subsidiaryof Household Finance Corporation ("HFC") (collectively"Household"). Plaintiff-below, Ruth Kahn ("Kahn"), onbehalf of the class, alleged that HAC breached its fiduciaryduty to the minority class by manipulation of the timing andterms of the merger and through non-disclosure of essentialfinancial data. The Court of Chancery rejected the fiduciaryclaims but ruled that minority shareholders who did not votefor the merger or tender their shares were entitled to a "quasi-appraisal" remedy and fixed the fair value of Wien stock at$7.27 per share.

Kahn appeals from certain of the Court of Chancery'srulings relating to non-disclosure of proxy information andrejection of plaintiffs expert's conclusion on valuation. Kahnalso contends that the Court of Chancery erred in excludingcertain members of the class from sharing in the increasedvaluation by reason of tendering their shares or voting for themerger. Household cross-appeals from the Court ofChancery's determination of value in excess of the $6 mergerprice, and the court's allowance of a quasi-appraisal remedyin the absence of a finding of unfair dealing. We affirm therulings of the Court of Chancery with respect to the fiduciary

"See Kahn v. Household Acquisition Corp., 591 A.2d 166 (Del. 1991).

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claims and valuation, but reverse as to the exclusion of certainmembers of the plaintiff class.8 3

As with the Delaware Supreme Court's decision in Bershad, whenthe decision in Kahn is viewed in the context of the decision affirmedtherein, the decision is no more than a noncontroversial aff'rmance of adetermination that stockholders who voted in favor of the merger, and whodid not have a cognizable cause of action for breach offiduciary duty inconnection with the merger, would not be granted the equitable remedy ofa quasi-appraisal created in Weinberger. Moreover, based on the peculiarfacts in Kahn, the Delaware Supreme Court held that stockholders who didnot vote in favor of the merger, but did thereafter surrender their stockcertificates for the merger consideration, would not be barred fromparticipating in the quasi-appraisal. As in Bershad, the decision in Kahndid not cut off the rights of any stockholder who otherwise possessed anactionable claim for breach of fiduciary duty based on the act of voting forthe merger or accepting the merger consideration.

Unlike the Delaware Supreme Court's decision in Bershad, thedecision in Kahn did specifically discuss the doctrine of acquiescence."As such, even though the strict holding of the Delaware Supreme Court'sdecision in Kahn does not involve the application of the doctrine withrespect to otherwise actionable claims of breach of fiduciary duty, thedecision does represent guidance from the Delaware Supreme Courtrespecting the application of the doctrine in the context of a freeze-outmerger. Accordingly, we pause here to consider the significance of thatguidance.

The Delaware Supreme Court's discussion of acquiescencecomprises but a portion of the last few pages of the court's thirteen-pagepublished opinion in Kahn, in which the court also discussed the relatedconcept of estoppel."s Moreover, the portion of the court's opinion dealingwith the consequence of a stockholder's surrender of his or her stockcertificates for the merger consideration (as contrasted with theconsequence of voting in favor of the merger) comprises only six shortparagraphs of the court's opinion."6 Because these six paragraphs representthe only explicit guidance from the Delaware Supreme Court respecting thepotential application of the doctrine of acquiescence, as applied to

31d. at 168."See id. at 176-77."See id.l6see Kahn, 591 A.2d at 176-77.

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stockholders who do not vote in favor of a freeze-out merger but dosurrender their stock certificates for the merger consideration, we quote thecourt's analysis in its entirety:

Acquiescence on the part of the shareholder by, forexample, tendering shares and accepting the benefits of thetransaction, even though the corporation's conduct is a breachof some duty owed to the shareholder, may also serve to barthe shareholder's right to equitable relief.

The act of surrendering shares is not, however,inequitable conduct which precludes assertion of rights toattack the underlying merger transaction under the facts ofthis case. Here, the rights of the plaintiff-class must bemeasured by their status at the time of the mergerannouncement. In particular, the November 24, 1980 proxystatement advised minority shareholders that class litigationon behalf of the minority shareholders had been commencedin the Court of Chancery asserting lack of a proper businesspurpose and attacking the fairness of the merger price. Theeffort to preliminarily enjoin the merger did not succeed,because the Court of Chancery viewed plaintiff's grievance asa claim of inadequate price which, under pre-Weinbergerjurisprudence, could be remedied notwithstanding theconsummation of the merger. However, the court recognizedthe ability of the minority shareholders "to receive $6.00 pershare to have and invest as they see fit while the case isproceeding." The court also noted that if the merger wereenjoined "all minority shareholders will be deprived of theopportunity to presently receive something of value for theirshares."

It thus seems clear that, at the inception of thislitigation, the Court of Chancery, in permitting the mergervote to proceed, viewed the minority shareholders' plight assubstantially ameliorated by their ability to accept thetendered price without prejudice to their right to improve theirlot through the later unfolding of the class action. In short,the court anticipated the events which came to pass in thiscase: despite the effectuation of the merger, the tender pricehas been deemed inadequate.

The Vice Chancellor recognized that shareholders whorelinquished their shares following the 1982 decision of then

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Vice Chancellor Brown may have been misled into believingthat, like plaintiff, Kahn, they could surrender their shares andbenefit from future recovery. In our view, class entitlementarose as well by reason of the 1980 decision which rejectedinjunctive relief, in part, on the rationale that acceptance ofthe merger price would not bar further relief. In applying theequitable defenses of estoppel or acquiescence, the courtshould consider what a reasonable minority shareholder wasentitled to assume at the time the merger was permitted toproceed and not limit that analysis to a later date when thedefense of standing was raised. Accordingly, all members ofthe class who did not vote in favor of the merger but whoabjured their appraisal right in favor of an expanded equityaction should share in the result of the quasi-appraisal processwithout limitation based on the surrender of shares that wasanticipated as a consequence of denial of the effort to enjointhe merger.

Our decision to permit all members of the class toparticipate in the increased valuation is to a large extent suigeneris, L e., a result required by the particular facts presented.As noted previously, this case has an unusual history becauseofthejurisprudential changes which have occurred during theten years it has been pending in the Court of Chancery as wellas the two pretrial rulings, which, inferentially at least,addressed standing. In doing equity, the court must be alert tothe need to fashion relief appropriate to the circumstances ofeach case.

Given the unusual history and circumstances of thiscase, we conclude that it was error for the trial court toforeclose equitable relief to any shareholder who surrenderedhis or her shares for payment of the merger price by exclusionfrom the class of minority shareholders entitled to share in thequasi-appraisal remedy. All class members who did not votein favor of the merger should receive the increased valuationof $7.27 per share fixed by the court."

"7Kahn, 591 A.2d at 177-78 (citing Trounstine v. Remington Rand Inc., 194 A. 95, 99(Del. Ch. 1937) (quoting Kahn v. Household Acquisition Corp., No. 6293,1980 Del. Ch. LEXIS622, at *11-13 (Del. Ch. Dec. 12, 1980) (citing Lynch v. Vickers Energy Corp., 429 A.2d 497(Del. 1981)).

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As can be seen from the courts analysis in Kahn, the court observedonly that the defense of acquiescence may serve as a bar to a stockholderwho accepts the benefits of the merger, and did not hold that the defenseshall apply in all such cases. The Kahn court's only example of whenacquiescence may apply to bar the claim of a stockholder who does notvote in favor of a challenged transaction is Trounstine-where the assertionof a claim challenging a corporate transaction was inconsistent withaccepting the benefit of the transaction. Finally, the court indicated thatthere must be a basis for finding the plaintiffs conduct in surrendering hisor her stock certificates for the merger consideration was "inequitable."

The Delaware Supreme Court's decision in Kahn also is significantfor what it does not say. Notably, the supreme court expressed nodisagreement with either Serlick or the aspect of Kahn II which held thatacquiescence does not apply to bar otherwise actionable claims of breachof fiduciary duty in connection with a freeze-out merger where the mergeris not conditioned upon a vote of a majority of the minority stockholders.The court's silence respecting this issue is particularly noteworthy whenone considers that the author of the Delaware Supreme Court's opinion inKahn was Justice Walsh, the former member of the Delaware Court ofChancery who decided Serlick. In addition, the supreme court in Kahnexpressed no disagreement with the court of chancery's observation inKahn II that the doctrine of acquiescence will not bar an otherwiseactionable claim for breach of fiduciary duty asserted by a stockholder whodoes not vote for the merger and that implicates the fair dealing prong ofthe entire fairness test.

K. Siegman, Iseman, and Turner: The Court of Chancery's DictaBreathe New Meaning into the Supreme Court's Decisions

ofBershad and Kahn

After the Delaware Supreme Court decided Bershadand Kahn, theredo not appear to be any further cases in which the parties litigated theavailability of a pre-Weinberger quasi-appraisal remedy. In the years thatfollowed Bershad and Kahn, the battleground shifted to the issue ofwhether the doctrine of acquiescence would bar otherwise actionableclaims of breach of fiduciary duty in a freeze-out merger asserted by or onbehalf of fully informed minority stockholders who did not vote in favorof the merger, but did surrender their stock certificates for the mergerconsideration after the consummation of the merger.

Two years after the Delaware Supreme Court decided Kahn, theDelaware Court of Chancery (by a jurist who is now a former member of

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NORBERG V. SECURITY STORAGE Co.

the Delaware Supreme Court) decided Siegman v. Columbia PicturesEntertainment, Inc." In Siegman, the court of chancery examined thehistory of the development of the doctrine of acquiescence, beginning withTrounstine, moving through Serlick and Kahn II, and concluding with theDelaware Supreme Court's decisions in Bershad and Kahn." Based uponthis examination of the law, the court of chancery concluded that theDelaware Supreme Courtfs decisions in Bershadand Kahn implicitly "havethe effect of precluding a determination of whether a particular shareholderwho surrenders his shares intended to acquiesce. ""

Significantly, the court of chancery in Siegman did not conclude thatthe Delaware Supreme Court's decisions in Bershad or Kahn overruled theaspect of the court of chancery's original decision in Kahn I, whichdeclined to apply the doctrine of acquiescence to bar otherwise actionableclaims of breach of fiduciary duty asserted by minority stockholders whodid not vote in favor of a freeze-out merger, but did surrender their stockcertificates for the merger consideration after the merger wasconsummated. Nor did the court of chancery in Siegman conclude that theDelaware Supreme Court's decisions in Bershad or Kahn overruled either(1) Serlick respecting the inapplicability of the doctrine of acquiescence tobar the claims of a non-assenting minority stockholder where a freeze-outmerger is not conditioned upon the vote of a majority of the minoritystockholders; or (2) Kahn II with respect to its holding that stockholderswho did not vote in favor of a cash-out merger, but did surrender theirstock certificates for the merger consideration, would not be barred frompursuing otherwise actionable claims of breach of fiduciary dutyimplicating the fair dealing prong of the entire fairness test.9 Moreover,inasmuch as the court of chancery in Siegman declined to conclude that theminority stockholders in that case were fully informed, any discussion inSiegman of the potential consequences of a contrary conclusion is dictum.93

"No. 11,152 (Del. Ch. Jan. 12, 1993), reprinted in 18 DEL. J. CoRP. L. 1171 (1993)."9See id, slip op. at 16-19, reprinted in 18 DEL. J. CORP. L. at 180-82.901d., slip op. at 20,reprintedin 18 DEL. J.CoRP.L. at 1182. But see Salomon Bros., Inc.

v. Interstate Bakeries Corp., 576 A.2d 650,654 (Del. Ch. 1989) (holding, in a different context,that "acquiescence requires at least conduct reasonably implying intent to acquiesce").

9'See Siegman, No. 11,152, slip op. at 21, reprinted in 18 DEL. J. CoRP. L. at 1182.9'See id."In addition, while the fact does not appear to have played a role in the court of

chancery's conclusion in Siegman, the court did begin its analysis of the acquiescence issue bynoting that the merger therein was the second step of a two-step transaction commenced with atender offer, and that the plaintiff had voluntarily tendered half of his shares into the first-steptender offer. See id, slip op. at 16, reprinted in 18 DEL. J. CoRp. L. at 1 180. This fact arguablywould tend to demonstrate the plaintiffs lack of opposition to the second-step merger.

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A month later, the Delaware Court of Chancery (by a jurist who isnow a sitting member of the Delaware Supreme court) decided Iseman v.Liquid Air Corp.," which reinforced Siegman's dictum. Iseman involveda short-form merger, accomplished pursuant to Section 253 of theDelaware General Corporation Law.9" Arguing acquiescence, the defen-dants moved for summary judgment based upon the fact that the plaintiffs(and proposed intervenors) had exchanged their shares for the mergerconsideration." The court of chancery in Iseman noted its inability todetermine whether the Information Statement distributed in connectionwith the short-form merger was materially accurate and complete anddenied the defendants' motion.97 Although the court of chancery's dis-cussion of the doctrine of acquiescence in Iseman suggests that the courtwould have found the plaintiffs' claims to be barred in the face of properdisclosure, any such suggestion is dictum insofar as the court of chanceryrejected the application of the doctrine on the basis of disclosure."

More recently, the court of chancery's decision in Turner v.Bernstein" reconfinmed Siegman's dictum. As such, Turner is to the sameeffect as Iseman.'°

L. Wood v. Best: The Chancellor Emphasizes the Significanceof the Question of Whether a Stockholder's Acceptance

of the Merger Consideration Was "Voluntary"

The next decision to address the issue came in the form of a letterruling, issued in connection with a discovery dispute, in Wood v. Frank E.Best, Inc.'° The court of chancery held in Wood that the doctrine of

"No. 9694 (Del. Ch. Feb. 11, 1993), reprinted in 18 DEL. J. CORP. L. 1025 (1993)."See id., slip op. at 2, reprinted in 18 DEL. J. CoRP. L. at 1028."See id., slip op. at 3-4, reprinted in 18 DEL. J. CoRP. L. at 1030."See id., slip op. at 4, reprinted in 18 DEL. J. CoRp. L. at 1030."See Iseman, No. 9694, slip op. at 3-4, reprinted in 18 DEL. J. CoRP. L. at 1029-38."No. 16,190 (Del. Ch. Feb. 9, 1999), reprinted in 24 DEL. J. CoRP. L. 1276 (1999).'"See id., slip op. at 21-22, reprinted in 24 DEL. J. CoRP. L. at 1293-94 (citing Bershad,

Slegman, and Iseman for the proposition that a fully informed stockholder who surrenders hisor stock certificates for the merger consideration will be deemed to have "waived" the right toseek equitable relief, but finding that summary judgment was inappropriate because there werematerial issues of fact regarding the adequacy of the defendants' disclosures); see also Andra v.Blount, No. 17,154, slip op. at 27-28 (Del. Ch. Mar. 29,2000), reprinted in 26 DEL. J. CORP. L.215, 235 (2001) (citing Bershad, and noting that "[a]bsent an effective challenge to thedisclosures in connection with the tender offer, tendering stockholders may well be subject tothe defense that they are estopped from challenging the fairness of a transaction whose benefitsthey willingly accepted").

'*'No. 16,281 (Del. Ch. Sept. 7, 1999).

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NORBERG V SECURITY STORAGE CO.

acquiescence could not be applied to bar the claim of a minoritystockholder based solely upon the fact that he or she accepted the mergerconsideration unless it could be determined that the acceptance was"voluntary."'I This ruling is consistent with Trounstine and the DelawareSupreme Court's decisions in Bay Newfoundland, Frank, and FederalUnited.

In a related field of the law, the federal courts have recognized thatthe surrender of stock certificates converted into the right to receive cashin a freeze-out merger does not constitute a voluntary exchange forpurposes of short swing profit regulations. 3 In so holding, the federalcourts have relied upon the rational that "[a]n exchange pursuant to amerger is 'involuntary' where the unsuccessful party has the 'utter inability

to control the course of events."""°In addition, it is noteworthy that a minority stockholder eliminated

in a freeze-out merger faces a real risk of being taxed on any gain realizedin the transaction in the year in which the merger occurs, without regard towhether the stockholder surrenders his or her shares for the mergerconsideration.0 5 One author stated:

The simplest form of consideration, and the form whichmost completely terminates the seller's interest in the soldbusiness, is cash. This can be cash on hand of the acquiror,cash on hand of the target itself, or cash raised by borrowingincurred (by either the buyer of the target) to finance theacquisition. In any case, the sellers will not be holding anydebt, equity or other instruments of the buyer or the targetissued in connection with the acquisition; hence, all taxconsequences to them occur at the time of the acquisition.'"'

'°21d., slip op. at 1-2.103See, e.g., Colan v. Prudential-Bach Sec., Inc., 577 F. Supp. 1074, 1082 (N.D. Ill.

1983).'"Id. (omission in original)."05See, e.g., Phillips & Rothman, 7770-2nd T.M., Structuring Corporate Acquisi-

tions-Tax Aspects (1999).16Id. at A-20. A minority stockholder whose shares are converted into the right to

receive cash in a freeze-out merger can avoid the realization of a taxable gain at the time of themerger by demanding an appraisal. In a case where a statutory appraisal remedy is inadequate,however, it would not be fair or equitable to require a stockholder to perfect a statutory appraisalclaim simply to avoid the realization of taxable gains, when the stockholders' real objective isto pursue a claim for breach of fiduciary duty in connection with the merger. In any event, thestatutory appraisal remedy is a benefit extended by the Delaware legislature, which"supplements" the common law remedies available for breach of fiduciary duty. It would turnthe statutory the legislative intent underlying the appraisal remedy on its head to conclude that

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If a minority stockholder eliminated in a freeze-out merger wouldrecognize taxable gain without regard to whether he or she actuallysurrenders his or her stock certificates for the merger consideration, thestockholder who declined to receive the merger consideration whilepressing a claim for breach of fiduciary duty would be required to pay taxon the "phantom" gain realized in the year of the merger. As such, thestockholder would be penalized for declining to accept the mergerconsideration while litigation challenging the merger progresses; thus, it isdifficult to understand how a stockholder's acceptance of the mergerconsideration could be viewed as a "voluntary" act.'07

IIl. THE DELAWARE COURT OF CHANCERY'S DECISIONOF NORBERG v. SECURITY STORAGE Co.

Norberg I was the Delaware Court of Chancery's first decisiondiscussing the doctrine of acquiescence following Wood.'"0 In Norberg ,the court of chancery acquiesced in the dictum in Siegman, Iseman, andTurner and dismissed an otherwise actionable claim for breach of fiduciaryduty in a freeze-out merger based solely upon the fact that a fully-informedstockholder surrendered his stock certificates for the merger considerationafter the merger was consummated.'" The merger in Norberg I had all theearmarks of a transaction that classically would result in the rejection of anasserted defense of acquiescence. ' 0 The merger was accomplished by theconsent of a majority stockholder without a minority vote."' Thecomplaint asserted claims of unfair dealing, with the burden of proof

the appraisal remedy "supplants" the common law, and that a minority stockholder must demanda statutory appraisal in order to preserve a claim for breach of fiduciary duty. Plainly, this is notthe law. As the Delaware Court of Chancery aptly recognized in Kahn 1, there is a materialdifference between cutting off a stockholder's statutory appraisal remedy based on thestockholder's receipt of the merger consideration and cutting off an otherwise actionable claimfor breach of fiduciary duty. In the former circumstance, the result is mandated by statute. Inthe latter circumstance, however, there is no statutory or common law principle that dictates sucha result.

"But see, Norberg v. Security Storage Co. (Norberg fl), No. 12,885, slip op. at 3 (Del.Ch. Jan. 12, 2001) (finding that the plaintiffs acceptance of the merger consideration was, infact, voluntary, notwithstanding the fact that he would be required to suffer adverse taxconsequences by failing to accept the merger consideration).

'""But cf Turner v. Bernstein, No. 16,190, slip op. at 29 n.31 (Del. Ch. June 6, 2000)(noting that defendants' assertion of the defenses of "waiver" and "ratification" might be bettertermed "acquiescence").

'0gNorberg 1, No. 12,885, slip op. at 2-3, reprinted in 27 DEL. J. CoRP. L. at 379."Old."'See id, slip op. at 2, reprinted in 27 DEL. J. CoRP. L. at 379.

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NORBERG V. SECURrIYSTORAGE CO.

falling upon the defendants to prove the entire fairness of the merger."There were even issues of disclosure that had not been resolved in favor ofthe defendants." 3 What, then, went wrong with the plaintiff's case?

According to the court in Norberg I, the plaintiff-unlike any otherformer stockholder in that case-exchanged his shares for the mergerconsideration "17 months after filing suit detailing a laundry list of reasonswhy the majority breached their fiduciary duties of disclosure and loyaltyto the minority."""

Consistent with the dictum in court of chancery's prior decisions inSiegman, Iseman, and Turner, the court in Norberg I stated the rule ofacquiescence:

Generally under the doctrine of acquiescence, ashareholder who tenders his shares and accepts the benefits ofa transaction may be barred from seeking equitable relief. Inorder for the defense to operate as a bar, the shareholder musthave been adequately informed of all material facts relevantto the transaction. In other words, acquiescence may result inan estoppel precluding the acquiescing shareholder, whoaccepted the pecuniary benefits of a transaction withknowledge of the alleged inequitable conduct, fromchallenging the transaction's validity. "

The court of chancery in Norberg I then proceeded to look only tothe question of whether the plaintiff was "fully informed" when heexchanged his shares for the merger consideration." 6 Finding that theplaintiffwas so informed, the court of chancery granted summary judgmentto the defendants on the issue of acquiescence." In so doing, the courtreasoned:

I agree with the defendants' assertion that our SupremeCourt's ruling in Bershad is controlling with regard toshareholder acquiescence on its own and similar facts.

'2See id...See Norberg1, No. 12,885, slip op. at 3, reprinted in 27 DEL. J. CoRP. L. at 379.""See id., slip op. at 2-3, reprinted in 27 DEL. J. CoRp. L. at 379.1"d., slip op. at 14, reprinted in 27 DEL. J. CoRP. L. at 385-86 (emphasis added)

(footnotes omitted)."'See id., slip op. at 18, reprinted in 27 DEL. J. CORP. L. at 388.-7See Norberg 1, No. 12,885, slip op. at 14-17, reprinted in 27 DEL. J. CoRP. L. at 385-

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Bershad, like this case, involved a minority shareholderchallenging a cash-out merger in a pleading styled as a classaction. Bershad alleged, inter alia, that the shareholder voteapproving the merger was invalid since the proxy statementomitted material facts. On summary judgment, the Court ofChancery dismissed the claims of Bershad and "allstockholders who either voted in favor of the merger oraccepted its benefits by tendering their shares for paymentunder the merger agreement." In other words, Bershadforfeited any rights he had to seek rescission of the merger byaccepting the merger consideration. This Court found that theproxy statement fully informed the minority shareholders ofall material facts regarding the merger. On appeal, theSupreme Court affirmed the Court of Chancery's finding thatthe minority shareholders were adequately informed of allmaterial information. After determining the shareholder votewas an informed one, the Supreme Court held that wheninformed shareholder's either vote in favor of the merger oraccept the benefits thereof, they are precluded from attackingthe fairness of the transaction. Thus, Bershad logically couldnot challenge the fairness of the transaction because afterbeing made aware of all facts material to the merger hetendered his shares and accepted the merger consideration." 8

Notably, the plaintiff in Norberg I specifically argued that "thedoctrine of acquiescence can not be applicable to an involuntary cash-outmerger transaction where the minority interests are squeezed out by themajority shareholder.""' 9 The court rejected this argument, stating:

In this circumstance, Norberg contends, even an informedshareholder surrendering his shares has no other alternativebut to accept the merger consideration. However, even if hecould not vote against the merger, rather than tendering hisshares and accepting the consideration, he could havemaintained his appraisal action and/or continued to litigate hisfairness claim. Instead, he abandoned his appraisal claim,challenged the fairness of the price and the process and later,

"'Id., slip op. at 17-18, reprinted in 27 DEL. J. CoRp. L. at 387-88 (footnotes omitted)(quoting Bershad, 535 A.2d at 841).

"9kd, slip op. at 19, reprinted in 27 DEL. J. CORP. L. at 389.

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NORBERG v. SECURnYSTORGE Co.

despite his declared assessment of the unfairness of thetransaction, freely and voluntarily accepted the mergerconsideration. I conclude that under these circumstances,Norberg's tender constitutes acquiescence.12 0

The plaintiff in Norberg I moved for reargument. In denying thatmotion in Norberg v. Storage Security Co (Norberg J1), 2 the court ofchancery offered the following observation:

The doctrine of acquiescence may work harshly attimes. The teaching of Bershad is straightforward: Ashareholder who tenders his shares and accepts the benefits ofa transaction will be barred from seeking equitable relief ifthe shareholder at the time of his tender was adequatelyinformed of the material facts relevant to the underlyingtransaction. 2

When the plaintiff moved for reargument, he sought to establish thathis decision to accept the merger consideration was not voluntary-evenif the court believed it was fully informed. The court in NorbergIIrejectedthis effort, stating:

The reason for Mr. Norberg's decision to tender hisshares was explained during argument on the motion forreargument. His shares were held by his IRA custodian.When the IRA custodian refused to continue holding theshares after termination of the appraisal proceedings, Mr.Norberg was confronted with the unhappy choice of: (i)taking custody of his shares and suffering adverse taxconsequences; or (ii) accepting the merger consideration. Hechose the latter. However, unfortunate the choice, it was Mr.Norberg's choice. The fact that his IRA custodian may haveplaced him in a difficult position does not alter the status ofhis knowledge of Defendants' alleged conduct or the simplefact that his decision was voluntary.12

'2Id., slip op. at 19-20, reprinted in 27 DEL. J. CoRp. L. at 389. The court in NorbergJwent on to conclude that the plaintiffs claim was barred by the separate and additional defenseof "waiver." See id., slip op. at 20-22, reprinted in 27 DEL. J. CoRp. L. at 389-90.

'No. 12,885 (Del. Ch. Jan. 12, 2001).'Norberg H, No. 12,885, slip op. at 2 (emphasis added) (footnote omitted).113d., slip op. at 3.

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Significantly, the defendants in Norberg I did not assert theaffirmative defense of acquiescence in their answer to the complaint.'24 Assuch, it may well be that the defense was waived as to minoritystockholders who received the merger consideration before the answer wasfiled, and it is unclear whether the court of chancery would otherwise haveextended the result in Norberg Ito reach the other minority stockholdersif the defendants had raised the defense in a more timely manner. Insofaras acquiescence was applied only to the one plaintiff who exchanged hisshares for the merger consideration seventeen months after the litigationwas commenced, any suggestion that acquiescence could have applied tothe other stockholders would be dictum."

IV. WERE NORBERG IAND NORBERG H CORRECTLY DECIDED?

As previously noted, Norberg I represents the first decision of aDelaware court to apply the affirmative defense of acquiescence to bar aminority stockholder who did not vote in favor of a merger from pursuinga claim for breach of fiduciary duty by a majority stockholder inconnection with a freeze-out merger. In so doing, Norberg I also becamethe first decision of a Delaware court to bar claims of a minoritystockholder in a freeze-out merger based on the affirmative defense ofacquiescence where (Ii) the merger was approved by the consent of themajority stockholder without any vote of the minority stockholders; (2) themerger was neither conditioned upon the approval of a majority of theminority stockholders or negotiated by a special committee of directors; (3)the complaint raised an issue of "unfair dealing"; and (4) there was nojudicial determination that there were no material misstatements oromissions in the defendants' disclosures relating to the merger. The factthat all of these circumstances were present in Norberg I makes thedecision particularly significant. The court in Norberg I extended theacquiescence doctrine beyond the specific facts and context present inKahn I, Bershad I, Schlossberg, Serlick, Kahn II, and the DelawareSupreme Court's decisions in Bershad and Kahn.-2

1"-Norberg I, No. 12,885, slip op. at 13, reprinted in 27 DEL. J. CoRp. L. at 385.'"See id., slip op. at 2-3, reprinted in 27 DEL. J. CORP. L. at 379."-'Moreover, the broad strokes of the court of chancery's extension of the existing law

in Norberg I were swung wider in Norberg II, which paints the Delaware Supreme Court's fact-specific inquiry in Bershad and Kahn into a black-letter rule of equity jurisprudence, which thecourt acknowledged may provide harsh results. The authors respectfully submit that it shouldbe a very rare case in which the application of an equitable defense operates in a harsh manner.Inasmuch as the court of chancery has the equitable authority (if not the obligation) to reject

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NORBERG V. SECURInY STORAGE CO.

The decision in Norberglis consistent with the dictum of the courtof chancery in Siegman, Iseman, and Turner. In each case, the court ofchancery cited the Delaware Supreme Court's decision(s) in BershadandlorKahn for the proposition that a fully-informed stockholder who surrendershis or stock certificates for the merger consideration after theconsummation of a freeze-out merger may be equitably barred frompursuing otherwise actionable claims of breach of fiduciary duty, even ifthe stockholder did not vote in favor of the merger. As explained above,however, no stockholder in either Bershad or Kahn was barred, for anyreason, from pursuing an otherwise actionable claim for breach of fiduciaryduty in connection with a freeze-out merger. The issue decided by theDelaware Supreme Court in Bershad and Kahn was not whether fully-informed minority stockholders whose shares were eliminated in a freeze-out merger could be barred from suing for breach of fiduciary duty on thebasis of their acceptance of the merger consideration. Rather, the issuedecided in both Bershad and Kahn was whether fully-informed minoritystockholders who surrendered their stock certificates for the mergerconsideration after the freeze-out merger was consummated, and had notasserted an actionable claim for breach of fiduciary duty in connection withthe merger, should nonetheless be permitted to participate in the quasi-appraisal remedy crafted in Weinberger as a substitute for the statutoryappraisal remedy the minority stockholders had not demanded. In Bershad,the Delaware Supreme Court affirmed the court of chancery'sdetermination that stockholders who accepted the merger considerationwould not be permitted to obtain the benefit of the quasi-appraisalremedy.' In Kahn, the Delaware Supreme Court determined, for reasonsparticular to that case, that stockholders who accepted the mergerconsideration should be permitted to obtain the benefit of the quasi-appraisal remedy.'" In neither case, however, did the Delaware SupremeCourt hold that a fully-informed minority stockholder who stated anactionable claim for breach of fiduciary duty in connection with a freeze-out merger could be denied the right to pursue a recovery based upon thefact that the stockholder received the merger consideration after the mergerwas consummated. Indeed, the Delaware Supreme Court did not even holdthat a fully informed stockholder who voted for the merger would be barred

legal defenses when doing otherwise would be inequitable, it is difficult to understand why thecourt would apply an equitable defense in a manner the court viewed to produce a harsh result

"See Bershad, 535 A.2d at 848.12 'See Kahn, 591 A.2d at 166.

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from pursuing a claim for breach of fiduciary duty in connection with themerger. 129

If one were to read the acquiescence discussion in the DelawareSupreme Court's decisions in Bershad and Kahn as providing guidance incases involving actionable claims of breach of fiduciary duty in a freeze-out merger (as opposed to being limited to cases involving the narrowquestion raised in Bershad and Kahn of the availability of the quasi-appraisal remedy in the absence of an otherwise actionable claim for breachof fiduciary duty) there are further limitations to the applicability of thatdiscussion that cannot be overlooked. Specifically, (1) the freeze-outmerger in Bershad was conditioned upon a vote of the majority of theminority stockholders, 30 and (2) the freeze-out merger in Kahn wasnegotiated with a special committee of disinterested directors."' Inaddition, neither Bershad nor Kahn involved a transaction approved by theconsent of a majority stockholder without a vote of the minoritystockholders. Finally, there is nothing "inequitable" (a term used by theDelaware Supreme Court in Kahn) about a minority stockholdersurrendering his or her stock certificates for the merger consideration aftera freeze-out merger is consummated, while simultaneously pursuing aclaim for breach of fiduciary duty in connection with the merger.'32

We discuss the potential significance of each of these factors, in turn,below.

A. The Significance of the Fact That the Freeze-Out Mergerin Bershad Was Conditioned upon the Vote of a Majority

of the Minority Stockholders

Because the freeze-out merger in Bershadwas conditioned upon thevote of a majority of the minority stockholders, the minority stockholders(as a group) had the ability to prevent the merger by withholding theirvote.' As such, in the absence of an actionable claim for breach of thefiduciary duty of loyalty, even minority stockholders who did not vote infavor of the merger were barred from pursuing any claim for relief based

'29See Solomon v. Armstrong, 747 A.2d 1098, 1117 (Del. Ch. 1999) (observing thatBershad does not address the issue of whether a fully informed stockholder who votes for afreeze-out merger by a majority stockholder will be barred from pursuing a claim for breach ofthe duty of loyalty).

130See Bershad, 535 A.2d at 843."'See Kahn, 591 A.2d at 169."'See id. at 177...See Bershad, 535 A.2d at 848.

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NORBERG v. SECUR17T STORAGE CO.

upon the doctrine of ratification. The Delaware Supreme Court in Bershadaffirmed the Delaware Court of Chancery's determination that the plaintiffsstated no actionable claim for breach of fiduciary duty, whatsoever. 3' Assuch, the claims of all minority stockholders plainly were barred by thedoctrine of ratification. 35 Significantly, this fact serves to highlight thatthe courtes decision in Bershad (involving the availability of the quasi-appraisal remedy) must be limited to its facts. Otherwise, the claims of allminority stockholders-including those who never received the mergerconsideration-would have been barred.

Moreover, the Delaware Supreme Court in both Bershad and Kahnidentified Trounstine as the guiding authority for determining when itwould be inequitable to permit a minority stockholder to obtain equitablerelief after accepting the benefit of the challenged transaction. As notedabove, however, Trounstine involved a challenged corporate action fromwhich a non-assenting minority stockholder had the right to refrain fromparticipating. By contrast, in a freeze-out merger that is not conditionedupon the vote of a majority of the minority stockholders, the merger iseffected and the equity interest of all minority stockholders is extinguishedand converted into right to receive cash by operation of law, and withoutany action on the part of the minority stockholder. As such, it is difficultto understand the manner in which Trounstine would apply to non-assenting minority stockholders in the case of a freeze-out merger that isnot conditioned upon a vote of a majority of the minority stockholder.Indeed, the Delaware Supreme Court in Kahn refused to allow the doctrineenunciated in Trounstine to be applied to such stockholders, even toextinguish their participation in a quasi appraisal remedy.

Further indication of the significance of the fact that the freeze-outmerger in Bershad was conditioned upon the vote of a majority of theminority stockholders is found in the Delaware Court of Chancery'sdecision in Serlick, which the Delaware Supreme Court did not criticize orpurport to overrule in Bershad (where the author of Serlick was a memberof the three-Justice panel) or Kahn (where the author of Serlick authoredthe Delaware Supreme Court's opinion). Given the Delaware SupremeCourt's undeniable knowledge of the Serlick decision, it is difficult toimagine that the Delaware Supreme Court would have failed to mentionSerlick if the court intended to overrule Serlick.

'ee id.1"See id.

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B. The Significance of the Fact That the Freeze-Out Merger in KahnWas Negotiated by a Special Committee of Directors

Kahn was decided three years before the Delaware Supreme Courtdecided, for the first time, that negotiating a freeze-out merger with aspecial committee of disinterested and independent directors would notrestore the protections of the business judgment rule. 36 Significantly, atthe time the Delaware Supreme Court decided Kahn, dicta in priordecisions of both the Delaware Supreme Court and Delaware Court ofChancery suggested that the business judgment rule might protect a freeze-out merger negotiated by a special committee of independent anddisinterested directors.' If the business judgment rule did apply in sucha circumstance, minority stockholders eliminated in a freeze-out mergernegotiated by a special committee would have had no viable cause of actionfor breach of fiduciary duty, and would be relegated to a statutory appraisalremedy (which requires no claim of wrongdoing).'

"'See Kahn v. Lynch Communication Sys., Inc., 638 A.2d 1110 (Del. 1994) (LynchCommunication). In the past few years, the court of chancery has recognized that, under LynchCommunication, minority stockholders eliminated in a freeze-out merger "need not demonstrateinadequacy of the appraisal remedy to survive a motion to dismiss" where their complaint"plead[s] facts sufficient to indicate a breach of fiduciary duty, which they seek to bring againstnot only the surviving corporation but against individual directors or majority shareholders aswell." Wood v. Frank E. Best, Inc., No. 16,281, slip op. at 15 (Del. Ch. July 9, 1999).

'3"See, e.g., Marciano v. Nakash, 535 A.2d 400,405 (Del. 1987) (stating, in the contextof an action challenging a transaction with an arguably controlling stockholder group, that"approval by fully-informed disinterested directors under section 144(a)(1) ...permitsinvocation of the business judgment rule and limits judicial review to issues of gift or waste withthe burden of proof upon the party attacking the transaction"); Rosenblatt v. Getty Oil Co., 493A.2d 929,937-38 (Del. 1985) (noting that the existence of arm's length negotiations conductedby disinterested directors "is of considerable importance when addressing ultimate questions offairness, since it may give rise to the proposition that the directors' actions are moreappropriately measured by business judgment standards"); In re Trans World Airlines, Inc.STholders Litig., No. 9844 (Del. Ch. Oct. 21, 1988) (declining to apply business judgment rulein freeze-out merger by majority stockholder only because the special committee did notproperly exercise its fiduciary responsibility to seek to negotiate the best price); In re ResortsInt'l S'holders Litig., No. 9605 (Del. Ch. Sept. 7, 1988) (approving settlement of claims assertedagainst majority stockholder challenging various transactions negotiated by a special committeeof independent and disinterested directors, and observing that "[tihe Delaware Supreme Courthas consistently held that where a disinterested board or special committee, fully informed andexpertly advised, makes a considered business decision, that decision will be entitledprimafacieto the presumptions and protections of the business judgment rule") (emphasis added); see alsoPuma v. Marriott, 283 A.2d 693 (Del. Ch. 1971) (applying business judgment rule to assettransaction between corporation and controlling stockholder group where transaction wasnegotiated and approved by board composed of a majority of disinterested directors).

rain recent years, the Delaware Court of Chancery has come to view LynchCommunication and other Delaware Supreme Court decisions as signaling a retreat from what

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NORBERG V SECURITY STORAGE CO.

C. The Significance of the Fact That Minority Stockholdersin Bershad And Kahn Were Provided an Opportunity to Vote

In a freeze-out merger approved by the consent of a majoritystockholder, minority stockholders are not even provided the opportunityto voice their opposition to the merger by voting against it, or even bywithholding their vote. In such a case, the minority stockholders donothing to facilitate the merger during the progress of a transaction.119

D. There Is Nothing "Inequitable" about a Minority StockholderSurrendering His or Her Stock Certificates for the MergerConsideration after a Freeze-out Merger Is Consummated,

While Simultaneously Pursuing a Claimfor Breach of Fiduciary Dutyin Connection with the Merger

In a case where minority stockholders are provided no opportunityto vote (as in a freeze-out merger approved by the consent of a majoritystockholder), and in cases where the appraisal remedy is inadequate(because, for example, an equitable claim may give rise to rescissorydamages or other remedies unavailable in a statutory appraisal), there isnothing inconsistent or otherwise "inequitable" (the term used by theDelaware Supreme Court in Kahn) about a minority stockholder pursuinga claim for equitable relief after submitting his or her stock certificates forthe merger consideration after a freeze-out merger is consummated, whilesimultaneously pursuing a claim for breach of fiduciary duty in connectionwith the merger. In such a case, the former stockholder's right to receivethe merger consideration is absolute, and would continue to exist even ifthe court ultimately were to find that the merger was entirely fair.140

once may have been viewed as the holding of Weinberger respecting the exclusivity of thestatutory appraisal remedy, and have concluded that minority stockholders eliminated in afreeze-out merger retain the ability to pursue relief outside the confines of a statutory appraisalaction even where the stockholders' only claim for breach of fiduciary duty related to the fairprice prong of the entire fairness test. See, e.g., Nagy v. Bistricer, No. 18,017, slip op. at 16-17(Del. Ch. Nov. 22, 2000). As such, it is arguable today that the holding in Lynch Irespecting thesurvival of a claim for breach of fiduciary duty implicating the fair dealing prong of the entirefairness test applies with equal force to a claim involving only the fair price prong of the test.Moreover, in view of the "unitary" nature of the entire fairness test, it is entirely unclear whetherthere is such an animal as a claim arising exclusively under the fair price prong of the test.Indeed, it is arguable that any freeze-out merger accomplished at an unfair price necessarilyinvolves an element of unfair dealing.

39See Frank v. Wilson & Co., 32 A.2d 277, 283 (Del. 1943).' lf a number of years pass before the litigation is concluded, of course, the merger

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Moreover, if the stockholder's suit were successful, any award of damageswould be offset by the amount of the merger consideration-therebyreducing the defendants' exposure to pre-judgment interest on the portionof the judgment that would otherwise be represented by the forfeitedmerger consideration.

In Trounstine, and in every case prior to Norberg I where theaffirmative defense of acquiescence has been applied to bar a plaintiff frompursuing relief from an extraordinary corporate transaction, non-assentingminority stockholders had the choice to accept the benefits of thechallenged transaction or maintain the status quo as to their interest.' 4' Inthe case of a freeze-out merger effected by a majority stockholder withoutany vote of the minority stockholders, the transaction was legally effective(and not a nullity) as against all minority stockholders without regard towhether they ever receive the merger consideration. As such, and aspreviously noted, even if all minority stockholders were to refuse tosurrender their stock certificates for the merger consideration whileprosecuting a lawsuit involving claims of breach of fiduciary duty, themerger still would be effective and the minority stockholders still wouldnot retain their equity interest in the corporation. In a very real sense, noexchange occurs when minority stockholders surrender their stockcertificates for the merger consideration after a freeze-out merger isconsummated. When the merger is consummated, the equity interest of allminority stockholders is extinguished and "converted" into the right toreceive the merger consideration (subject only to the statutory appraisalright) by operation of law, and without any action on the part of theminority stockholders. The minority stockholders are powerless to preventthis conversion. Moreover, the minority stockholders' right to receive themerger consideration would survive even if a court later were to conclude

consideration due to a minority who does not surrender his or her stock certificates to thesurviving corporation may escheat to the state. In such a case, the minority stockholder will needto deal with the particular laws of whatever state receives the merger consideration before he orshe may receive the merger consideration. In the end, however, the merger considerationunqualifiedly belongs to the minority stockholder.

"'See Trounstine v. Remington Rand, Inc., 194 A. 95 (Del. Ch. 1937). But cf. Turnerv. Bernstein, No. 16,190 (Del. Ch. Feb. 9, 1999), reprinted in 24 DEL. J. CORP. L. 1276 (1999);Iseman v. LiquidAir Corp., No. 9694 (Del. Ch. Feb. 11, 1993), reprinted in 18 DEL. J. CORP. L.1025 (1993); and Siegman v. Columbia Pictures Entm't, Inc., No. 11,152 (Del. Ch. Jan. 12,1993), reprinted in 18 DEL. J. CoRP. L. 1171 (1993), stating that it would hold the plaintiffs'claims to be barred if they were fully informed of all material facts respecting the freeze-outmergers therein. As noted herein, however, the court of chancery's statement in these cases wasdictum, because the court was unable to find that adequate disclosure had been made. As such,the court in none of these cases was called upon to make the hard judgment of whether to bar anotherwise actionable claim based on full disclosure.

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NORBERG V. SECURTY STORAGE CO.

that the defendants generously overpaid in the merger.'412 Other than topreserve a statutory appraisal claim, it would be a meaningless act forminority stockholders eliminated in a freeze-out merger to continue to holdtheir stock certificates (which no longer represent an equity interest in thecorporation).

Moreover, unlike the plaintiff in Trowstine, minority stockholderseliminated in a freeze-out merger have no prospect, much less a right, toretain their equity interest in the corporation as a consequence of thelitigation. In essence, the minority stockholders have no choice but toaccept the merger consideration and sue for breach of fiduciary duty."3

Admittedly, the minority stockholders could elect to pursue an appraisal,but that choice would not be meaningful in a case where appraisal is not anadequate remedy. Hence, the court of chancery recognized in Kahn Ithatacquiescence will not apply in freeze-out mergers involving issues of fairdealing. By definition, appraisal is an inadequate remedy in such a case.As such, a minority stockholder's acceptance of the merger considerationis not a voluntary choice.'" Indeed, it would be inequitable to the plaintiffif his only choices were (1) to elect an inadequate appraisal, or (2) to acceptinadequate merger consideration. 45

In the case of a freeze-out merger accomplished without a vote of theminority stockholders, and where there are actionable claims of breach offiduciary duty by the majority stockholder, the only equitable result is toallow minority stockholders to accept the inadequate merger considerationand sue for breach of fiduciary duty (with the defendants receiving a creditagainst any judgment in the amount of the merger consideration). Plainly,there is nothing inconsistent or inequitable in the minority stockholdersdoing so. Unlike the plaintiff in Trounstine, a minority stockholdereliminated in a freeze-out merger does not seek to have his cake and eat ittoo. Rather, the stockholder simply seeks to be made whole.

1421n an analogous setting, the Delaware Court of Chancery has recognized thataccepting the benefit of ajudgment will not operate as a waiver of the right to an appeal if thereis no risk that the appeal would result in a lesser recovery. See, e.g., Falcon Steel Co. v. HCBContractors, Inc., No. 11,557, slip op. at 11-12 (Del. Ch. Apr. 4, 1991).

"3Trounstine v. Remington Rand, Inc., 194 A. 95 (Del. Ch. 1937).'"See Colan v. Prudential-Bach Sec., Inc., 577 F. Supp. 1074, 1082 (N.D. Ill. 1983)."'Accord In re Petition of Kara B. Rubenstein, 637 A.2d 1131, 1134 n.2 (Del. 1994)

(noting that a party's acceptance of one of two inadequate alternatives---characterized by thecourt as a "Hobson's Choice"--will not give rise to an estoppel).

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V. CONCLUSION

Without regard to whether the court reached the correct conclusionas to the particular plaintiff in Norberg I and with respect to the peculiarfacts presented therein, serious questions are raised by the sweepinggenerality of the court of chancery's analysis. As set out more fully hereinabove, we submit that the analysis in Norberg I and II was not mandatedby the Delaware Supreme Courts opinions in Bershad or Kahn. Indeed, itis arguable that the analysis in Norberg I and II runs contrary to the courtof chancery's prior decisions, and there is no question that the analysis iscontrary to the court of chancery's analysis in Serlick and Kahn II. At thistime, there is a split of authority in the decisions of the Delaware Court ofChancery. With the possible exception of Wood, the post-Kahn decisionsof the court of chancery (including decisions by two sitting members of theDelaware Supreme Court) would apply the doctrine of acquiescence to anystockholder who accepts the merger consideration, provided there has beenfull disclosure. The pre-Kahn decisions (also including decisions by twositting members of the Delaware Supreme Court) would not apply thedoctrine in a freeze-out merger where minority stockholders are affordedno vote and where there are actionable claims of unfair dealing.Ultimately, this split of authority will need to be resolved by the DelawareSupreme Court.

Post Script-

Prior to the publication of this article, an advance copy wassubmitted to the court of chancery in the case of In re Best Lock Corp.StockholderLitigation,'" in connection with the court's consideration of thedefendants' motion to dismiss based on the doctrine of acquiescence. Thecourt of chancery's decision which denied the defendants' motion employsreasoning materially similiar to the analysis set forth herein. 147

'-No. 16,281, 2001 Del. Ch. LEXIS 134 (Del. Ch. Oct. 29, 2001).141See id.

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Documents

NORBERG v. SECURITY STORAGE CO.: STRETCHING THE … · NORBERG v. SECURITY STORAGE CO.: STRETCHING THE LIMITS OF THE DOCTRINE OF ACQUIESCENCE IN FREEZE-OUT MERGERS By BRUCE L. SILVERSTEIN'AND